Our future retirement home and capital gains - section 45(3) election -

Dear Sir.

My husband and I have tried very hard to bring ourselves to some point where we feel we can retire reasonably ok. We both come from poor backgrounds- and its been a long haul- and now I'm afraid we may have made a serious financial mistake. We paid off our home as quickly as possible so that we could be mortgage free to try to work toward preparing our retirement. We saved very carefully to buy what will be our retirement home. We currently live in Northern BC and want to move to Ontario when our working life is finally done. So after much hard saving,and being very diligent, we bought our home in Ontario with our saved cash - no mortgage.  We have 5 more years to work here. We thought if we bought 5 years early, we would not only be able to purchase our home in Ontario (as we were scared housing costs would soon outstrip our ability to buy, as we will certainly be unable to hold a mortgage at retirement )but we would also rent out our Ontario home to try to supplement our s
avings for retirement, but also to finance the costs of our move to Ontario. The house is with a property manager, and of course it is currently a 'rental property' for tax purposes. My concern is this: when we sell our current home and move into our Ontario home, are we then going to have to pay a capital gains tax on it? How would that work? (If we sell our 'principal residence' and the Ontario house then becomes our 'principal residence'). Please help me understand our options and what we are facing in terms of taxation. I'm afraid we may not have gone through the stress of renting out our lovely home, if we had understood that any possible contributions a rental income may have made to our retirement will just be lost through a huge tax bill. I am very stressed about this and have been reading to try to understand our situation, but haven't found anything that approximates what I have described. I would greatly appreciate some advice and your kind assistance.

Most sincerely,

david ingram replies:

There is nothing wrong with your logic of  buying the house at today's price although there are a lot of us that are predicting that the price of your Ontario house will be significantly lower five years from now.

However, If I am wrong or "the Greater Fool" Author Garth Turner is wrong, and the prices go up more, you will be really glad you bought now. read some of the information at www.greaterfool.ca

And if it does go down a bit, it will not matter in the long run because you have covered your bases.

I find it unusual that you would retire from where you are so well known and active to Ontario however.  I love your area and the Nass Valley and the Lava Bed Provincial Park, etc.  I consider Harry Nyce and Joe Gosnell of the NISGA'A my personal friends and was up there for the opening of their new  legislative building in September, 1998 although I had to leave two days before the actual ceremony..

The Canadian Income Tax situation is that you and your husband are only allowed to own one home tax free at any one time.  If you had left the Ontario home empty, you could make a choice of which one.  However, because you have rented the Ontario house out before you lived in it, any increase in value between the date you bought it and the day you move in WILL BE TAXABLE -  No if's, and or buts.  The day you move in, a rental property is considered to be sold and rebought at fair market value that day.  You must calculate the profit on schedule 3 and put the taxable amount on line 127 of your return. 

However, you do not necessarily have to pay tax then.  If you have not claimed depreciation on the property while it was rented, you can make an election under Section 45(3) of the tax act to defer paying the actual tax until you physically actually sell the building.in the future.  You make the election and write the amount on line 256 of the return as a deferral.

As a lady who has vehemently protested the carbon tax and claims the teacher's illegal strike was legal because of Canada's signing of international treaties - I quote from the Ubyssey:

The BC Government's stance that this strike is 'illegal" is based on their decision to "opt out' of the regulatory body that oversees worker's rights in democratic countries. Canada, however is the signatory to this body, not individual provinces. The protection of democratic rights through the ILO for the people of this province is not at the prerogative of the provincial political party currently in power.
The BC government has nine rulings and directives against it from the United Nations (ILO) for the violation of worker's democratic rights, one of which states that teachers are not essential service,and a directive to the BC government to restore teacher's rights to bargain and to strike. The BC government ignored these rulings and directives. Any government that abuses legislative power to violate workers' democratic rights,to make laws, in order to meet their political agendas, is in the company of countries like Argentina, Chile, Venezuela, and Guatemala.

And changed animal cruelty laws should recognize that the law is the law and needs to be dealt with.

The government needs the tax dollars to pay those exorbitant teachers salaries and pay for animal welfare officers to prosecute those offenders.  I admit that I do not like the carbon tax because it is applied too universally without recognizing the needs of the colder areas of BC where the rebate will not have a big effect and where public transit is not available.  However, the NDP have not come up with a practical plan either other than 'scrap the tax' as a populous move.

However, none of these things will effect you once you move to Ontario.

PS teacher's salaries are not necessarily exorbitant.  I am the treasurer for three different PACS in the province and can talk for a week about school boards, teachers and parents who do not give a damm.

Keep up the good work.  But do be prepared for a tax bill in the future unless I am correct and the house in Ontario does not go up in the next five years. 

This older question and answer series will help you as well.m - You are not alone.

My question is: Canadian-specific

My husband and I have recently bought a mobile home on an acre in Nelson to move to in a few years when we find work there, or much later when we retire.  We currently live in a rented apartment near Vancouver as we work in town.  Our mobile home is rented out to tenants and we intend to let them stay until we would like to move to Nelson.  It is the only home that we own but it is rented out until we can move there. Can you let us know how that would affect us in terms of Capital Gains?  I know that each year we will have to claim the rental income and write off our costs for the mobile home / land against it.  Thank you very much for your feedback.

david ingram replies:

When you move into the former rental, it is considered a deemed disposal and re-acquisition.  Capital Gains tax is due and payable on any increase in value at that time.


If while renting, you did NOT claim CCA (Capital cost Allowance) or depreciation on the T776 (rental schedule), you can defer paying the tax at that time though.

When you do move in, calculate the increase in value and report Half on schedule 3 of your return and half on schedule 3 of your husband's return That schedule will, in turn, result in one half of the half being put on line 127 of your return as taxable income. 

You can now write a letter to the Tax office stating: " I hereby elect to defer paying the tax triggered by my moving into my rental property under Section 45(3) of the income tax act."

You then write the amount on line 127 on line 256 where it is subtracted from taxable income.  Write - see election letter  beside line 256.

These older Questions are in the same vein.

My question is: Canadian-specific


We are in the process of purchasing a house in Penticton and will rent it out, retire (in about 4 years)and  move into it ourselves.  If we live there for 2 or more years are we liable for capital gains for the period we collected rental income?  What type of home insurance is best for a rental property?  What are your thoughts re the real estate market in the Okanagan in the next five years - steady growth or a slump after "2010"? 
Many thanks,

david ingram replies:

You are liable for capital gains income tax for the period you rented it out.  In fact "When you move into the house", you will trigger a capital gains tax because of a change in use from a business use to a personal use.
The good news is that you can make an election under Section 45(3) of the income tax act to defer paying the tax until you actually sell the property. To make the calculation, fill in schedule 3 and put the taxable profit on line 127 of your T1.  then deduct the same amount on line 256 under Section 45(3).

I think the Okanagan AND the lower mainland markets are already overheated and think the prognosis is for little or no growth for the next five years but I have been wrong before.

That does not mean you should not buy because if I am wrong, it will cost so much more to buy six or seven years from now that you will be cursing me all the way to the mortgage broker.  If you buy and it goes down a bit, it does not matter because you are buying it to live in and that gives you the property in the future at today's price which is historically lower.



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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. 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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