Renting out owned residence because of move for work and tax issues -

QUESTION:

I have a near-hysterical friend who moved to Alberta for a job, since her Vancouver job ended, so she rented out her condo (formerly her principal residence). She rented a place in Alberta but job did not work out after 6 months - she can't get the tenants out because of a lease and she now has a job offer on Vancouver Island. Can she be exempted from capital gains if she temporarily rents on the Island,sells her place in Vancouver and buys a new place (principal residence). How horrific would the tax be for that year given the rise in housing prices if she does have to pay. The tenants have rented for 5 or 6 months and might be induced to leave with a big cash incentive but she would be working on the Island. She lved in US for 3 moths doing another temporary job, where she rented , but left her Vancouver condo empty.
Thank you for your help for this complicated issue.
---------------------------------------------------------------
david ingram replies:

Under section 45(2) of  the income tax act, she can elect to claim the property as a tax free for ever while transferred or up to four years under any other circumstances.

She also has to report the US earnings on her Canadian return on line 104 and 433.  She claims the tax, state tax, medicare and Social security she paid to the US on line 431 of her Canadian return and will get dollar for dollar credit fo the taxes paid to the US on her Candain return.

For the US, she has to file form 1040NR and what ever State return needs to be done.  For instance, New York would be form IT203 and California would be 540NR.

The following older Q & A will likely help.
My question is: Canadian-specific

QUESTION: I have owned my home for 4 years and have subsequently moved in with my boyfriend and am now planning to sell my home. I have been renting it out for the past six months and am wondering about the tax implications relating to capital gains, thank you in advance,

david ingram replies:

You have not been living with the boyfriend long enough to be considered a common-law spouse sop at the moment - for a year anyway - you can both have a principal residence tax free.

After that, you are limited to one as a common law couple.  Since you are selling yours now within a year, you will get any profit capital gains tax free by filing a section 45(2) election with your 2006 return reporting the rental income on schedule 776.

Attach a note to your 2006 tax return stating something like this

I hereby elect to consider the residence at xxx address, city, prov,etc, to be my principal residence for up to four years even though i did not ordinarily inhabit it after (date).

When you do sell, complete form T2091 to calculate the tax free portion.  Form 2091 says you to do not need to file it with your return but keep it in case the CRA wants to see it.  My suggestion is that you send it with the return and get it over with.

These older questions will give you a little more:

>> QUESTION:
>>
>> Hi, 
>>
>> Last year, we rented out our condo in Vancouver.  The
>> plan then was to have the rent cover our mortgage
>> payments for the 12 months that we would be away.  A
>> short term solution.
>>
>> Now, we are planning to be away from BC for a longer
>> period of time (approx. 2 years) and wish to sell the condo
>> in the middle of the year, as we are unable to rent the
>> condo for any longer due to strata council by laws.
>>
>> 1) If we sell the condo when there has been a tenant living
>> in it for 12 months, will we pay capital gains?
>>
>> 2) What are our best options to avoid paying this tax?
>>
>> 3) If capital gains would be owed, for how long would we
>> have to make the unit our principal residence again before
>> we can sell it and not pay CGT?
>>  
>> Thank you,
 _________________________________________________________________
   
david ingram replies:
 
If you filed a section 45(2) election with your first year's rental, you 
can rent the condo out for up to 4 years (plus 1 in the calculation) 
without incurring capital gains tax if you have not bought another 
residence that you are lioving in.
 See Below:
 
My question is: Canadian-specific

QUESTION: Dear Mr. Ingram,
I bought a house in the December of year 2000, lived there till the end of December 2000 (3 weeks) and started to rent it out on January 1, 2001. I filed the election 45(2) to claim the house as my primary residence for years 2001, 2002, 2003 and will do it for 2004.
I do not claim a depreciation for those years.
I want to sell the house now. Do I need to move in house first in order to avoid the payment of the capital gain taxes. For how long I have to stay there to be eligible for not paying the capital gain taxes on sold house if I need to move in.

Thank you in advance for you help,
----------------------------------------------------------
david ingram replies: 
 
First I am going to repeat your old question from last July and my answer.
 
My question is: Canadian-specific

QUESTION: Hi, David!
I would like to know is it possible to use the election under the section 45(2) again if the old house is sold and the new one is bought. Can it be used unlimited number of times by the condition that it is used for each house only once.

Thank you  
---------------------------------------------------------------------------
David Ingram replies:
 
Section 45(2) is intended to allow people to try something out.  This means that if you move to a rented condo for a couple of years and rent your house out, you can move back into the house without suffering a capital gains tax under section 45(2).
 
Since it was passed on June 17, 1972, (32 years ago now) I have never seen it used more than twice by one person.
 
Does not mean it has not been used more than twice in thirty years, it just means it is unlikely.
 
There is no numeric restriction but if you are moving in and out of houses, the CRA will treat you as a trader and tax you at full rates.
 
----------------------------------------------------------
Now, to answer this question.  Section 45(2) is NOT something you can plan to use.  In other words, your living in the house for three weeks and renting it out and filing a section 45(2) election does NOT make it tax free if you bought the house to rent and not to live in as your personal principal residence.
 
Your question indicates to me that you are trying to beat the system and did not buy the first house to live in and unless you can show the tax office that you moved every stick of furniture in and really intended to live there, the CRA will not allow it to be sold tax free.
 
This year, a new policy of the CRA is that they wish form T2091 to be filed with every tax return where a personal house was sold during the year.
 
If it was your residence and you genuinely intended to live there and were transferred of suddenly got married or could not stand your neighbour or lost your driver's licence or suffered some other disaster that caused you to "HAVE TO" move suddenly, filing section 45(2) will make it tax free provided you did not also own another house that you did live in.   If you did own another house that you actually lived in, claiming the house you have filed the 45(2) election for as tax free, will MAKE THE HOUSE YOU ACTUALLY LIVED IN TAXABLE.
 
If you have a genuine 45(2) election, you do not need to move back in.  If it is not a genuine 45(2), moving back in will TRIGGER a tax bill as you move in.
 
You need a consultation with someone who knows the rules before you make a mistake. I am available in person or by phone at a fee of $350.00 minimum for an hour but not until November now.
 
As many know, I charge this for US / Canada tax an immigration advice as well.  I am not alone though.
 
If you have a tough US immigration question to ask or one that  I cannot deal with (remember I do Immigration AND tax) Joe grasmick is the place to g for a telephone consultation.  HIs fee is $295.00 per HALF hour and you can get hold of him at http://s1.amazon.com/exec/varzea/ts/exchange-glance/Y01Y4838730Y0462867/104-8053170-6203936
 
I have sent two out of town people to him in the last month where it was obvious to me tha tthe people needed a lawyer as opposed to a consultant..
 
If you want a free answer for a couple of minutes, remember
 
Answers to this and other similar  questions can be obtained free on Air every Sunday morning.
 
Every Sunday at 9:00 AM on 600AM in Vancouver, Fred Snyder of Cartier Partners and I will be hosting an INFOMERCIAL but LIVE talk show called "ITS YOUR MONEY"
 
Those outside of the Lower Mainland will be able to listen on the internet at
 
 
Local phone calls to (604) 280-0600 - Long distance calls to 1-866-778-0600.
 
Old shows are archived at the site.
 
 
 
This from ask an income tax immigration planning and bankruptcy expert consultant guru or preparer  from www.centa.com or www.jurock.com or www.featureweb.com. Canadian David Ingram deals daily with tax returns dealing with expatriate:
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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 & the author and any and all
non-contractual duties are expressly denied. All readers should obtain formal advice from a competent financial, or real estate planner or advisor & appropriately qualified legal practitioner, tax or immigration specialist in connection with personal or business affairs such as at www.centa.com.
 
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