Amendment to 2007 Canadian Federal Budget re: capital gains - deemed sale and section 45(3) -

Dear David,
I am a Canadian citizen. I was a factual resident in Finland for 10 years and have returned to Canada - 2007. The house that I own in Canada has been rented the entire time when owning it, from 1990 until now. I have never lived in this house.
I spoke to a CCRA employee about capital gains tax when selling a house when living in Canada or living in Finland. She happened to mention that there might have been an amendment in the Canadian 2007 Federal Budget. She read somewhere that when the capital gain is less than $350,000 CAD, there would be no tax. This would even pertain to me when never living in the house.
I contacted the Department of Finance 3 times to find out the true answer. No answer yet. I’ve checked their website also. I’m not anxious about moving into this house and get stuck in it for 2 years. Culture shock has taken place and it will also remain. This is a fact. Some day in the near future, I wish to return to Finland and live there.
Furthermore, I am seriously considering getting a Finnish citizenship. Deadline is May 2008. Very much easier and cheaper to do this in Canada than in Finland. But, I don’t know if both countries can tax me, when having a dual citizenship during retirement.
What should/can I do before retiring? Sell the house in Canada or when living in Finland, or …? I don’t even know anything about the amendment idea. If there was an amendment, I would simply continue to rent the house and not have to live in it. The house of course would be a so-called ‘mattress’ to fall back on when moving back to Finland and then have to return to Canada for some unknown reason.
This scenario no doubt looks like a ‘cobweb’. What are your thoughts about this?
Br,
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david ingram replies:

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

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

.I am going to ignore the rest of the question.  If these things are a problem, 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 to my general audience to deal with in this free forum.

I hope that you have been filing your rental returns under Section 216(4) while out of the country.  That would involve forms 1159 and T776.

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, my family and I became non residents while I worked overseas. During the period that we were overseas we rented our home in a long term lease agreement. When we returned to reside in Canada we purchased another home to live in and we have continued to rent our original house. Could you please explain how capital gains will be handled? Do we need to file anything forms with CRA prior to selling the rental house? Also, how would capital gains be handled if we sell our current personal residence and move back into the rental house?

Best regards,
________________________________________________________________
david ingram replies:

The first house has incurred capital gains tax from the moment you left the country.  Although it is possible to rent a house out for 4 years and claim it capital gains tax free by filing an election under section 45(2), this does NOT apply to non-residents.  We have had a couple of cases lately where the capital gains tax on the house is more than the tax saved bt becoming a non-resident for three or four years because the houses went up so much in value.

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

Deemed Disposition!

Moving in to a rental house 'triggers' the capital gains right now although it does not have to be paid right now. The capital gains is calculated on schedule 3 an dthe amount put on line 127 of the T1 General Canadian Tax return.  You then make an election to defer payimng the tax until actual sale under section 45(3) and deduct the line 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 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!
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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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This is not intended to be definitive but in general I am quoting $900 to $2,900 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.
 
$1,100 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

$2,900 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 $175.00 up.
 
With a Rental for $375
 
A Business for $375 - Rental and business likely $500
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 $800 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 will be $150 to $500.00 depending upon numbers of bank accounts, RRSP's, existence of rental houses, etc.

Just a guideline not etched in stone. 
 
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