Personal residence rented out in - Sections 45(2) and 45(3) and election -



QUESTION: I bought a condo in Nov. 2006 and it was my principal residence from Nov '06 to July 31, '07. On Aug. 1, '07 I moved but kept the condo and rented it to a tenant.  If I sell the condo this year or next year do I have to claim capital gains if the condo increases in value.  How long can a property be considered a principal residence? I heard it was up to 4 years.  Also, I was considering moving back into the condo before I sell it because somebody told me if I do that it will be considered my principal residence.  If that is true - how long do I have to live there before I sell it.  

  
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david ingram replies:

I am too busy to answer this from scratch - this older question should give you the info you desire,.
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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, Adele.
_______________________________
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.
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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 living 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,
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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  
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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.
 
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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.

However, that tax bill can be delayed by filing another election under Section 45(3).  In this case, you would report the profit on Line 127 and then claim a deduction on line 256 under section 45(3).  This election is not well known.  I have Never, not once in the 36 years it has existed, seen another accountant use it.
 
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 that the 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 DUNDEE WEALTH MANAGEMENT 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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 David Ingram's US/Canada Services
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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.
 
David Ingram gives expert income tax & immigration help to non-resident Americans & Canadians from New York to California to Saudi Arabia to Mexico to China or Chile - Cross border, dual citizen - out of country investments are all handled with competence & authority.

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SUGGESTED PRICE GUIDELINES - May 17, 2008

david ingram's US / Canada Services
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My Home office is at:
4466 Prospect Road
North Vancouver,  BC, CANADA, V7N 3L7
Cell (604) 657-8451 -
(604) 980-0321 Fax (604) 980-0325

Calls welcomed from 10 AM to 9 PM 7 days a week  Vancouver (LA) time -  (please do not fax or phone outside of those hours as this is a home office) expert  US Canada Canadian American  Mexican Income Tax  service help.
pert  US Canada Canadian American  Mexican Income Tax  service and help.
David Ingram gives expert income tax service & 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.
 
Phone consultations are $450 for 15 minutes to 50 minutes (professional hour). Please note that GST is added if product remains in Canada or is to be returned to Canada or a phone consultation is in Canada. ($472.50 with GST for in person or if you are on the telephone in Canada) expert  US Canada Canadian American  Mexican Income Tax  service and help.
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. However, if you have a stack of 1099, or T3 or T4A or T5 or K1 reporting forms, expect to pay an average of $10.00 each with up to $50.00 for a K1 or T5013 or T5008 or T101 --- Income trusts with amounts in box 42 are an even larger problem and will be more expensive. - i.e. 20 information slips will be at least $350.00
 
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 received as much as $6,000 back for an $1,800 bill and one recently with 6 children is resulting in over $12,000 refund. 

Email and Faxed information is convenient for the sender but very time consuming and hard to keep track of when they come in multiple files.  As of May 1, 2008, we will charge or be charging a surcharge for information that comes in more than two files.  It can take us a valuable hour or more  to try and put together the file when someone sends 10 emails or 15 attachments, etc. We had one return with over 50 faxes and emails for instance. 

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.
 





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