Listed personal Property - Personal Use Property - Capital Gains or straight income. - T4037 -

My question is: Canadian-specific

QUESTION: My friend sold me her house where I thought I will move in later. I decided later I don't want it and sold it back to her with a loss.  How do I use my losses for tax deduction? Please help. Thanks.

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david ingram replies:

Since you bought the house to live in, there is no deduction for capital losses other than against a listed personal property capital gain.

Put the cost price in the ACB box 3 on line 7 of Schedule 3 and the sale price to the left in box 2 on line 7 under Personal Use Property.

The following definitions come from the CRA Capital Gains booklet number  T4037 -
 http://www.cra-arc.gc.ca/E/pub/tg/t4037/t4037-e.html#P185_17749

Personal Use Property - refers to items that you own primarily for the personal use or enjoyment of your family and yourself. It includes all personal and household items, such as furniture, automobiles, boats, a cottage, and other similar properties.- refers to items that you own primarily for the personal use or enjoyment of your family and yourself. It includes all personal and household items, such as furniture, automobiles, boats, a cottage, and other similar properties.

Note that losses from Personal Use property are not deductible against future gains from Personal Use Property as they are for Listed Personal Property.

Listed personal Property LLP - is a type of personal-use property. The principal difference between LPP and other personal-use properties is that LPP usually increases in value over time. LPP includes all or any part of any interest in or any right to the following properties:

• prints, etchings, drawings, paintings, sculptures, or other similar works of art;
• jewelery;
• rare folios, rare manuscripts, or rare books;
• stamps; and
• coins.

Since the government's own words say that Listed Personal Property usually increases in value, I do not see why a summer cottage is not in listed personal property.  You may want to challenge the status quo and claim your house as a Listed Personal property.

Also note, that if you had bought the property to rent out, it would be a capital loss that could be carried forward against any other capital gains. 

And, if you had bought the property to flip, the loss could be used this year against any other income you have.
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These older answers will give some other ideas.

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 all the
subsequent implications.

Read the full article at <http://tax.centa.com/comment.php?mode=view&cid=8>

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david ingram replies:

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
another one.

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.

david

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
residence?

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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
downtown building.

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.

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