selling rental property in Vancouver to buy another.

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My question is: Canadian-specific
QUESTION: I bought a half-duplex in Strathcona for 390k in July 2005. I
intended to keep it for about 3-5 years before selling (took a 5 yr. closed
mortgage at 4.1%, with about 100k down). It is tenanted at $1850/mo. I just
had it appraised and as a result (it was appraised at 441k), have decided to
put it up on the market in January 2006, and use the proceeds as a
downpayment on a legal triplex that I will live in while renting out the 2
other suites (completion on triplex to be complete March 2006). My question
is: because I am essentially "flipping" the half-duplex, will I be taxed on
it as straight income, or as a capital gain? Also, are there any
implications that I should be aware of regarding selling one investment
property in order to finance another "partial" investment property? Also of
note may be the fact that I have been underemployed this past year and will
have very little incoome to report in 2005 - but since the sale and purchase
of the 2 properties will occur in early 2006, is this even relevant? It all
seems terribly complicated and I'd be extremely grateful for any insight you
could share on this matter.
==================================================
david ingram replies:
If this was in the US you  could do a section 1031 rollover to defer the tax
to an eventual sale but in Canada there is NO rollover provision for rental
properties.
The five year closed mortgage indicates you did intend to keep it for a
while and it likely makes the sale a capital gain.  Selling it to buy
another rental with a owner's suite makes economic sense.
If you sell it in 2006, it will have no effect on your 2005 return other
than that you will have to report the rental income on Canadian form T776.
My internet is down as I write this or I would give you a link to the form
but you can find it at www.cra-arc.gc.ca
click on English,
Click on forms and publications and go to the T7 section
You will notice highlighted numbers on the form.  Sort and save your
expenses in these categories to make your return easier.
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