Capital Gains Tax when moving back into Canadian rental. -

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david ingram replies:


The minute you move in, you have created a deemed disposition and owetax on the increased value on the Canadian tax return for that year.The amount would be calculated on schedule 3 and the result put on line127 of the return.

If you have claimed CCA (depreciation or capital cost allowance) youmust pay recapture tax on that amount on form T776. the recapture wouldbe included in the final rental statement and show up on line 126.

That is the answer if you claimed CCA.

If you did NOT claim CCA, there is no recapture and you can deferpaying tax on the capital gain by filing an exemption under Section45(3) of the tax act. This must be in writing and you would put thesame amount you had on line 127 on line 256 and subtract it. The CRAkeeps track of this amount and when you do sell teh house in thefuture, you will owe the tax at that time.

This situation does not exist in the USA.

These older questions will help and of course, you know where we are atthe time.



Hi David,

Just to refesh your memory, I'm a Canadian teacher living/working inxxxxxxxxxxxx, who spent an afternoon with you at your house lastsummer.
I own 2 condos in Vancouver. Haven't lived in Canada nor paid any taxthere for 15 years. Bought my condos 3-4 years ago.

They are worth a lot more now than then. What if I moved back toVancouver & lived in one of my condos? Would I avoid the CapitalGains tax on that condo?

For how long do I need to actually occupy a place in order to fulfillresidency rules & not pay the Capital Gains?
Please advise. Thanks.

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david ingram replies:

The second you move in, you would owe tax on the increased valuebecause of the legislated deemed disposal. these older questions willgive you the idea.


DearDavid,
Iam a Canadian citizen. I was a factual resident in Finland for 10 years and have returnedto Canada- 2007. The house that I own in Canada has been rented theentire time when owning it, from 1990 until now. I have never lived inthis house.
Ispoke to a CCRA employee about capital gains tax when selling a housewhen living in Canadaor living in Finland.She happened to mention that there might have been an amendment in theCanadian 2007 Federal Budget. She read somewhere that when the capitalgain is less than $350,000 CAD, there would be no tax. This would evenpertain to me when never living in the house.
Icontacted the Department of Finance 3 times to find out the trueanswer. No answer yet. I=92ve checked their website also. I=92m not anxiousabout moving into this house and get stuck in it for 2 years. Cultureshock has taken place and it will also remain. This is a fact. Some dayin the near future, I wish to return to Finland and live there.
Furthermore,I am seriously considering getting a Finnish citizenship. Deadline isMay 2008. Very much easier and cheaper to do this in Canada than in Finland.But, I don=92t know if both countries can tax me, when having a dualcitizenship during retirement.
Whatshould/can I do before retiring? Sell the house in Canada or when living in Finland,or =85? I don=92t even know anything about the amendment idea. If there wasan amendment, I would simply continue to rent the house and not have tolive in it. The house of course would be a so-called =91mattress=92 to fallback on when moving back to Finland and then have to return to Canadafor some unknown reason.
Thisscenario no doubt looks like a =91cobweb=92. What are your thoughts aboutthis?
Br,
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david ingram replies:

There is no such thing as a $350,000 capital gains exemption on a houseand never has been.

If you have never lived in the house and sell it, it is subject tocapital gains tax in Canada. If you were to move into it, IT WOULD BEA DEEMED DISPOSAL AND is is subject to capital gains tax the day youmove in although if you never claimed CCA (capital cost allowance ordepreciation) when you move in you can defer the capital gains taxuntil actual sale by filing an election uder section 45(3) OF THEINCOME TAX ACT.

=2EI am going to ignore the rest of the question. If these things are aproblem, you need to do a consultation with me or someone like me. There ae too many specific "what ifs" that will not or never apply tomy general audience to deal with in this free forum.

I hope that you have been filing your rental returns under Section216(4) while out of the country. That would involve forms 1159 andT776.

This older question might help a bit.
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My question is: Canadian-specific

QUESTION: Hi David,

I am a Canadian citizen. However, from March 2000 to Nov 2004, myfamily and I became non residents while I worked overseas. During theperiod that we were overseas we rented our home in a long term leaseagreement. When we returned to reside in Canada we purchased anotherhome to live in and we have continued to rent our original house. Couldyou please explain how capital gains will be handled? Do we need tofile anything forms with CRA prior to selling the rental house? Also,how would capital gains be handled if we sell our current personalresidence and move back into the rental house?

Best regards,
________________________________________________________________
david ingram replies:

The first house has incurred capital gains tax from the moment you leftthe country. Although it is possible to rent a house out for 4 yearsand claim it capital gains tax free by filing an election under section45(2), this does NOT apply to non-residents. We have had a couple ofcases lately where the capital gains tax on the house is more than thetax saved bt becoming a non-resident for three or four years becausethe houses went up so much in value.

I am assuming here that the second house you are living in hasincreased in value more than the rental since you returned and itshould be your principal residence for that time because it would havebeen possible to declare the rental capital gains tax free after yourreturn by filing the election.

Deemed Disposition!

Moving in to a rental house 'triggers' the capital gains right nowalthough it does not have to be paid right now. The capital gains iscalculated on schedule 3 an dthe amount put on line 127 of the T1General Canadian Tax return. You then make an election to deferpayimng the tax until actual sale under section 45(3) and deduct theline 127 amount on line 256.

This older question will likely help you understand it.


QUESTION:

We have moved out of country for job reasons and now look to return to
Canada. Before leaving we tried to sell our home and were unable. For the
last 10 years we have been renting it. We plan to move back into andthen
sell it. What must we do in order to avoid paying capital gains tax.

Dan

PS We did not know that we could have declared it our principalresidence
as we moved for job reasons and thus, did not do that!

david ingram replies:

When you moved out of Canada, you should have done a departing Canadareturn and filled in either a T1161 or the former form (number escapesme at the moment) to declare assets left behind.

At any rate, if you became a non-resident of Canada from your job move,there is no exemption from capital gains tax on the increased value ofthe house unless you were a deemed or factual resident of Canada whileyou were gone. A deemed or factual resident status can apply to peoplewho are working on CIDA projects, are members of the armed forces, aremembers of a Canadian Diplomatic mission, working for the UnitedNations and a couple of other esoteric items covered by Regulation3400.

Your Belgian email address makes most of these possibilities unlikely.

In addition, you would have had to report your earned income to Canadaevery year and I presume that you did not do that but did file aSection 216(4) rental return to report the rent received.

A further complication is that if you returned to Canada and boughtanother house which you moved into, there would not be an immediate taxbill but if you move into the rental house, it is deemed to have beensold and you (and your spouse if joint) owe tax on the increased value.

Fortunately, under section 45(3) of the Canadian Income tax act, youcan notify the CRA (Revenue Canada when you left 10 years ago) that: Ihereby elect under section 45(3) of the Income Tax Act to defer thepayment of tax on the residence at XXX your street, until the actualsale. Attach a proforma Schedule 3 to calculate the profit and thenpay it when you
actually sell the house.

In other words, if your intention was to move in for a short time totry and make it tax free, you are just doubling your moving expensesand increasing your accounting and legal fees.

If the idea is to move into a new house on your return, you are betteroff to sell the one you have first and buy the new one
before you come back so that you have the most capital freed up to buythe next house and move directly.

- Incidentally - If you decided to keep the old one as a rental andborrow money against it to use to purchase the new one, the interest onthe borrowed money is NOT deductible against the rental income eventhough the mortgage is registered against the rental house because themoney was USED
to buy the personal residence you are about to occupy.

You can learn more about this by reading CRA Bulletin IT-533 at:
http://www.cra-arc.gc.ca/E/pub/tp/it533/it533-e.pdf

You can find out more about interest as a deduction by reading myNovember 2001 newsletter by going to www.centa.com,clicking on newsletters in the top left box, click on 2001 and click onNovember.
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Answers to this and other similar questions can be obtained free onAir every Sunday morning.

Every Sunday at 9:00 AM on 600AM in Vancouver, I, david ingram am apermanent guest on Fred Snyder of Dundee Wealth Managers' LIVE talkshow called "ITS YOUR MONEY"

Those outside of the Lower Mainland will be able to listen on theinternet at

www.600AM.com <http://www.600am.com/>


Call (604) 280-0600 to have your question answered. BC and Albertalisteners canalso call 1-866-778-0600 .

Callers to the show and questioners on this board can also attend theThursday Night seminars on finance and making your Canadian Mortgage Interest deductible.


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On February 11, 2008, DavidIngram wrote:

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However, I regularly search for the words"PAYINGCUSTOMER" 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 notesto myself have been spammed out and as an example, as I wrote this onDec 25, 2007 since June 16th, my 'spammed out' box has47,941 unread messages, my deleted box has 16645 I have actually lookedat and deleted and I have actually answered 1234 email questions forclients and strangers without sending a bill. I have also put aside847 messages that I am maybe going to try and answer because they lookinteresting. -e bankruptcy expert US Canada Canadian American Mexican Income Tax service and help
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This is not intended to be definitivebut in general I am quoting $900 to $3,000 for a dual country taxreturn.
$900 would be one T4 slip one W2 slipone or two interest slips and you lived in one country only (but werefiling 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 onerental
$1,300 would be the same with onebusiness no rental
$1,300 would be the minimum with amove in or out of the country. These are complicated because of theback and forth foreign tax credits. - The IRS says a foreign tax credittakes 1 hour and 53 minutes.
$1,600 would be the minimum with arental or two in the country you do not live in or a rental and abusiness 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 andyou 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 andno capital gains, etc. for $200.00 up.
With a Rental for $400, two or threerentals for $550 to $700 (i.e. $150 per rental) First year Rental -plus $250.
A Business for $400 - Rental andbusiness likely $550 to $700
And an American only (lives in the USwith no Canadian income or filing period) with about the same things inthe same range with a little bit more if there is a state return.
Moving in or out of the country orpart year earnings in the US will ALWAYS be $900 and up.
TDF 90-22.1 forms are $50 for thefirst 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 - (maybeamalgamate 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 theCanadian return as a guide for seven years at a time will be from $150to$600.00 per year depending upon numbers of bank accounts, RRSP's,existence of rental houses, self employment, etc. Note that thesereturns tend to be informational rather than taxable. In fact, ifthere are children involved, we usually get refunds of $1,000 per childper year for 3 years. We have done several catch-ups where the clienthas recieved as much as $6,000 back for an $1,800 bill and one recentlywith 6 children is resulting in over $12,000 refund.

This is aguideline not etched in stone. If you doyour own TDF-90 forms, it is to your advantage. However, if we put themin the first year, the computer carries them forward beautifully.
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