Rental Condo to Principal Residence - Canadian-US-Global Income tax help - david ingram expert US CANADA cross border non-res
============Changing Rental Condo to Principal Residence
We bought a condo several years ago to generate rental income and our secondary intent was to move into the condo upon retirement. Since we became empty nesters this year, we are now considering selling our house and moving into the condo which has appreciated in the meantime so there is an unrealized capital gain.
Under the “change in use” tax rules (see Canada Revenue Agency’s IT-120R6 – Paragraph 28) a taxpayer can defer recognition of that gain until the ultimate actual sale of the condo by using something called subsection 45(3) election. As I understand it the taxpayer simply files a letter with their tax return for the year when the condo is ultimately sold to request this deferral and of course to settle income tax owing on the deferred capital gain at the later date.
However IT-120R6 also states that the above deferral election “is not possible” if CCA (Capital Cost Allowance or tax depreciation) has been claimed as an expense at anytime when the condo was generating income. And indeed we claimed about $6K of CCA in total to reduce our income tax payable on the condo’s rental income for a couple of tax years – and there have been no CCA claims since 2005. (My phone call to CRA’s answer service confirmed that such deferral is not possible.)
Of course the worst case scenario here is that CRA demands their tax payment of capital gains up-front – ie. in the year we move into the condo which would likely force us to sell the condo so we can pay the capital gains tax.
Question - Are there any practical remedies to get the tax deferral despite of having made the CCA claims for a couple of years?
Regards, XXXXXXXX XXXXXXX - Winnipeg, MB
david ingram replies:
Your situation is very common.
Your question was sent to my 'joke address' but is common enougfh to warrent another stab at it.
I spent twenty years telling people to buy a rental condo instead of an RRSP because they could move into it in retirement. Most of the time, I told them to buy TWO, one for the wife and one for the husband so they did not need tomove in together. And my Investment Guide published in 1989 and 1991 gave the same advice and sold some 55,000 copies.
Unfortunately, your advisor or wjhomever prepared your tax return did you a great disservice by claiming the CCA. There is no doubt that since at least 1976, the taxation "RIGHT NOW" of a building you have claimed CCA on has been reasonably well known. You quoted the 2003 Bulletin IT 120R6 but it was very clear four editions earlier in IT120R2.which was dated Dec 6 1976 as I remember it..
You will owe the tax if and when you move in to the Condo.
Look at the bright side however. You bought it at yesterday's price, someone else helped pay for it and the tax you pay is no more than about 12% of the actual capital gain plus a bout another $2,400 to pay back the tax on the CCA and you are even paying it back with smaller dollars than the original tax refund you received by claiming the CCA.
Even if it went up $500,000, the tax will be no more than $60,000. Surely, you can pay that with part of the proceeds from the sale of your present residence.
If worse comes to worse, put a mortgage on the condo and pay it off on a monthly basis.
However, do not put a mortgage on it first if you have any investments whatsoever.
Sell the investment first and pay the tax.
Then, if you need that investment back, you can put a mortgage on the condo to buy the investment and the mortgage interest will be deductible.
See the Nov 2001 newsletter in the top left hand corner at www.centa.com for more info on making your mortgage interest deductible.
Here are some older Q & As on the subject.
Hello David, I currently own a rental property and would like to demolish, build and move in, so it becomes my primary residense before I sell it. The house has been a rental property for the past 7 years. My question is how will the Capital Gains be treated by the government, over the 7 years it was claimed as a rental property, when I sell the new house as it becomes my primary residense? Thanks
david ingram replies:
This is the second time I have answered this. somehow or other the half hour answer disappeared in the sending the first time.
1. When you move into a rental property, it triggers a deemed disposition and any increase in value of the property becomes taxable on schedule 3 and line 127 of your T1 tax return.
2. If you have been claiming CCA (Capital Cost Allowance) (depreciation) on the building part and the building has maintained its real value or gone up in value, then you must add the CCA 'recaptured' on to your last rental T776 schedule and pay tax on it.
3. If you did NOT claim CCA, you will not have to pay tax on the recaptured amount AND, AND, AND you will be able to defer paying tax on the amount of Capital Gain you reported on line 127 under Section 45(3) of the tax act.
What you do is get a separate piece of paper and write
"Under section 45(3) of the Income Tax Act, I hereby elect to defer paying tax on the deemed disposition of the property at:
123 XXX Street
Canada X1X 1X2
until the property is actually sold"
Then you put the amount of capital gain on the deemed disposition on line 256 of the return and write Section 45(3) beside the number 256 as an explanation.
Then when you sell the house ten or fifteen years later, you have to remember to add that amount back on to line 127 of that year's tax return and pay tax the year of the actual sale.
Any gain between the deemed sale value and what you actually sell it for is tax free as your principal residence UNLESS.
You are just moving in to make it look like your principal residence because you think it will all be tax free.
If you are building this new house to make money and only moving in to make it look like a tax free principal residence or to avoid the BC homeowners warranty program, the CRA will tax you on the profit at normal tax rates.
You should go to www.centa.com, click on TAX GUIDE in the top left hand box and then click on the Capital Gains Section. Although written 16 years ago, it is still apropos regarding all these rules. In fact the taxable part of capital gains went from 50% to 66 2/3% to 75%, down to 66 2/3% and is now back at 50% since it was written.
The following will also help explain when a house you live in is tax free, taxable as a capital gain, and fully taxable.
My question is: Canadian-specific
QUESTION: If I bought and moved into a house and decide 6 months later that
I don't like it and sell that house to move elsewhere do I attract capital
gains on the sale of my home?
david ingram replies:
And how high is up?
If you bought a house to resell any profit is taxable at ordinary income
rates unless you can get it into another category.
If you bought a house or cabin to rent or use as a second home and decide
ten years later to sell it for some reason or other, it is likely a capital
If you buy a house and decide to sell it in six months, you can expect that
the CRA "might" try and tax you at full rates unless you can show that the
house was truly your principal residence and that you sold it for reasons
other than making a profit.
reasons might be:
1. You lost your job
2. The school your child goes to is just not any good
3. You cannot stand your neighbour
4. You get divorced
5. you are transferred to another city
6. You are pregnant and need a bigger house
7. My favourite was a couple who ended up in a battle with organized
druggies and sold out in fear of their lives.
However, if you bought a fixer upper and fix it up and sell it and buy
another fixer upper around the corner and your kids keep on going to the
same school and you shop at the same stores and catch the same bus, etc.,
you will be paying straight tax.
The US is different. In Canada it is "all" tax free as a principal
residence or taxable. In the USA, you have to have lived in the home for 2
out of the last five years to claim up to $250,000 tax free per person. If
you sell before the 24 months is up for a good reason - death of a spouse
job transfer, job loss, etc. - then you can prorate the $250,000 by
multiplying $250,000 by the number of months you were in it divided by 24
(12 months would be $125,000 for instance).
My question is: Canadian-specific
If we buy a fixer-upper to renovate and flip without renting it out what are the allowable expenses for deductions?
david ingram replies:
In general anything you spend to do the fixing is a deduction from the final sale profit. This would include but is not limited to:
materials, subcontractors, legal, accounting, real estate commissions, surveyors, appraisals, interest on the mortgage, interest on a building loan, interest on material loans (maybe because you used a credit card to buy), truck expenses to get supplies and transport tools, afvertising, utilities, photography, landscaping, trash removal, dumping fees, building permits, architects fees, engineering fees, home inspection fees, insurance, helpers, etc.
Remember that any profit is taxable at straight income rates on line 135. Flipping or renovating does NOT create capital gains tax. The following older Questions will explain that a bit.
A "friend" who is a BC realtor and has the flipping question presented to her
from time to time recently attended a seminar that was related to this
subject. As a result she was able to provide me with some interesting
thoughts to ponder concerning "intent" and "professional background" when it comes to "flipping houses"
and tax in Canada. You may possibly be looked at as a Developer with all the
Read the full article at <http://tax.centa.com/comment.php?mode=view&cid=8>
david ingram replies:
Of course, that is / was my article
In Canada, the purchase and sale of any piece of real estate with or without
renovations is considered a sale and subject to straight income tax unless:
1. It was bought for and clearly used as your personal residence and was
intended to be used for an indefinite period of time which is usually in the
five to ten year range.
2. It was bought as and used as a recreational property
3. It was bought for the purposes of earning long term rental income.
In the case number 1, there is no tax.
In the case of numbers 2 and 3, the sale is treated as a capital gain and
only fifty per cent of the profit is taxed at your regular tax rates.
Lots of / many (anyone caught) are taxed full tax rates when they buy a
house, move in, fix it up and sell it a year or two later and then do
Of course, most are NOT caught in these circumstances.
However, "any" flip is going to be straight income unless the person can
prove that they bought it to live in and then:
* married a person with three children and it is not big enough (had to sell
and bought bigger)
* were transferred to another city (had to sell to buy in new city)
* lost their job, were injured, etc. and can no longer afford to move in. In
this case, they would have to show that they had the finances to have paid
for it when they bought it. (Not only can they not afford it but they have
moved into their parents' basement (boomeranged).
* Inherited a house from their parents and do not need it any more. (are
living in the new house)
You can read more by going to www.centa.com - click on tax guide in the top
left hand corner and then click on the "capital gain" section.
This older q & A also gives an idea
My daughter is closing on a presale Yaletown condominium this summer. She
is working until Christmas in Alberta. She returns to Vancouver from Jan to
May and if the job becomes a full time position, then she may return to
Alberta to live. At the time of presale, February 2004, we thought that the
suite would be assigned to her and that she would live in the suite.
I was hoping that she could declare the suite as her permanent residence
since she is only renting in Alberta and the work is not permanent. In
May 2007, she could decide to keep or sell the suite.
What does she need to do in order to qualify the suite as her permanent
david ingram replies:
There is no absolute answer because you can call a toad a frog all day long
but it is still a toad.
To be a principal residence and tax free for income tax purposes, the
property must have been bought by her to live in and she HAS TO move into
it. - No exceptions that I know of.
You can expect that the CRA will be looking at "every" quick resale in EVERY
In deciding if it is a capital gain or a flip, the CRA will be looking at
the suitability of the unit as a residence, the ability to pay for the unit
and past and even future performance.
In other words if she claimed this one as a principal residence and then did
it again a year later, the CRA would have every right to go back and
reclassify the first one.
David Ingram wrote:
On January 29, 2008, David Ingram wrote:
However, I regularly search for the words"PAYING CUSTOMER" and always answer them first if they did not get spammed out. For the last two weeks, I have just found out that my own email notes to myself have been spammed out and as an example, as I wrote this on Dec 25, 2007 since June 16th, my 'spammed out' box has 47,941 unread messages, my deleted box has 16645 I have actually looked at and deleted and I have actually answered 1234 email questions for clients and strangers without sending a bill. I have also put aside 847 messages that I am maybe going to try and answer because they look interesting. -e bankruptcy expert US Canada Canadian American Mexican Income Tax service and help
It is very unlikely that blind or unexpected email to me will be answered. I receive anywhere from 100 to 700 unsolicited emails a day and usually answer anywhere from 2 to 20 if they are not from existing clients. Existing clients are advised to put their 'name and PAYING CUSTOMER' in the subject line and get answered first. I also refuse to be a slave to email and do not look at it every day and have never ever looked at it when I am out of town. e bankruptcy expert US Canada Canadian American Mexican Income Tax service and help
Therefore, if an email is not answered in 24 to 48 hours, it is likely lost in space. You can try and resend it but if important AND YOU TRULY WANT OR NEED AN ANSWER from 'me', you will have to phone to make an appointment. Gillian Bryan generally accepts appointment requests for me between 10:30 AM and 4:00 PM Monday to Friday VANCOUVER (Seattle, Portland, Los Angeles) time at (604) 980-0321. david ingram expert US Canada Canadian American Mexican Income Tax service and help.
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Disclaimer: This question has been answered without detailed information or consultation and is to be regarded only as general comment. Nothing in this message is or should be construed as advice in any particular circumstances. No contract exists between the reader and the author and any and all non-contractual duties are expressly denied. All readers should obtain formal advice from a competent and appropriately qualified legal practitioner or tax specialist for expert help, assistance, preparation, or consultation in connection with personal or business affairs such as at www.centa.com. If you forward this message, this disclaimer must be included." e bankruptcy expert US Canada Canadian American Mexican Income Tax service and help.
David Ingram gives expert income tax & immigration help to non-resident Americans & Canadians from New York to California to Mexico family, estate, income trust trusts Cross border, dual citizen - out of country investments are all handled with competence & authority.
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This is not intended to be definitive but in general I am quoting $900 to $3,000 for a dual country tax return.
$900 would be one T4 slip one W2 slip one or two interest slips and you lived in one country only (but were filing both countries) - no self employment or rentals or capital gains - you did not move into or out of the country in this year.
$1,200 would be the same with one rental
$1,300 would be the same with one business no rental
$1,300 would be the minimum with a move in or out of the country. These are complicated because of the back and forth foreign tax credits. - The IRS says a foreign tax credit takes 1 hour and 53 minutes.
$1,600 would be the minimum with a rental or two in the country you do not live in or a rental and a business and foreign tax credits no move in or out
$1,700 would be for two people with income from two countries
$3,000 would be all of the above and you moved in and out of the country.
This is just a guideline for US / Canadian returns
We will still prepare Canadian only (lives in Canada, no US connection period) with two or three slips and no capital gains, etc. for $200.00 up.
With a Rental for $400, two or three rentals for $550 to $700 (i.e. $150 per rental) First year Rental - plus $250.
A Business for $400 - Rental and business likely $550 to $700
And an American only (lives in the US with no Canadian income or filing period) with about the same things in the same range with a little bit more if there is a state return.
Moving in or out of the country or part year earnings in the US will ALWAYS be $900 and up.
TDF 90-22.1 forms are $50 for the first and $25.00 each after that when part of a tax return.
8891 forms are generally $50.00 to $100.00 each.
18 RRSPs would be $900.00 - (maybe amalgamate a couple)
Capital gains *sales) are likely $50.00 for the first and $20.00 each after that.
Catch - up returns for the US where we use the Canadian return as a guide for seven years at a time will be from $150 to $600.00 per year depending upon numbers of bank accounts, RRSP's, existence of rental houses, self employment, etc. Note that these returns tend to be informational rather than taxable. In fact, if there are children involved, we usually get refunds of $1,000 per child per year for 3 years. We have done several catch-ups where the client has recieved as much as $6,000 back for an $1,800 bill and one recently with 6 children is resulting in over $12,000 refund.
This is a guideline not etched in stone. If you do your own TDF-90 forms, it is to your advantage. However, if we put them in the first year, the computer carries them forward beautifully.
This from "ask an income trusts tax service and immigration expert" from www.centa.com or www.jurock.com or www.featureweb.com. David Ingram deals on a daily basis with expatriate tax returns with multi jurisdictional cross and trans border expatriate problems for the United States, Canada, Mexico, Great Britain, United Kingdom, Tax Convention. Advice on bankruptcy e bankruptcy expert US Canada Canadian American Mexican Income Tax service and help .
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