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 and then
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 principal residence
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 Canada return
and filled in either a T1161 or the former form (number escapes me a t ithe
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 of the
house unless you were a deemed or factual resident of Canada while you were
gone. A deemed or factual resident status can apply to people who are
working on CIDA projects, are members of the armed forces, are members of a
Canadian Diplomatic mission, working for the United Nations and a couple of
other esoteric items covered by Regulation 3400.
Your Belgian email address makes most of these possibilities unlikely.
In addition, you would have had to report your earned income to Canada every
year and I presume that you did not do that but did file a Section 216(4)
rental return to report the rent received.
A further complication is that if you returned to Canada and bought another
house which you moved into, there would not be an immediate tax bill but if
you move into the rental house, it is deemed to have been sold and you (and
your spouse if joint) owe tax on the increased value.
Fortunately, under section 45(3) of the Canadian Income tax act, you can
notify the CRA (Revenue Canada when you left 10 years ago) that: I hereby
elect under section 45(3) of the Income Tax Act to defer the payment of tax
on the residence at XXX your street, until the actual sale. Attach a
proforma Schedule 3 to calculate the profit and then pay it when you
actually sell the house.
In other words, if your intention was to move in for a short time to try and
make it tax free, you are just doubling your moving expenses and increasing
your accounting and legal fees.
If the idea is to move into a new house on your return, you are better off
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 buy the
next house and move directly.
- Incidentally - If you decided to keep the old one as a rental and borrow
money against it to use to purchase the new one, the interest on the
borrowed money is NOT deductible against the rental income even though the
mortgage is registered against the rental house because the money 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 my November
2001 newsletter by going to www.centa.com, clicking on newsletters in the
top left box, click on 2001 and click on November.
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