Changing percentages in real estate ownership.

My question is: Canadian-specific

QUESTION: My wife and I own several rental properties. Over the last
three years renovating them has exceeded expenses so the loss was written
off on my income. (my wife had no outside income however has now started
working part time this year) Now too, this past year and from here on, the
houses are profitable. In Canadian tax law can I now have the income from
the houses shown as my wife's income or at least split with my wife as she
is an equal owner.

david ingram replies:

The first statement I would make is that "renovating" any rental unit is not
a deductible expense on a Canadian Income tax return. Renovations are
usually considered additions to the ACB (adjusted cost basis) of the
building and can be depreciated against rental profit at 4% per year on the
diminishing balance but can not be used to create or increase a loss.

I am referring to renovations here, not repairs, which is different.

If a person buys a new rental and knows when he or she bought the unit that
they were going to repair / renovate / remodel / improve the bathrooms and
kitchens and paint the whole building before their first rental, none of the
fixing up / renovating / remodelling, etc expenses are deductible because
they are absolutely (no exceptions) a capital addition to the building.

On the other hand, if one buys a building, has a building inspection saying
that the building is in perfect condition, and then finds out six months
later that there is dry rot running under the floor of five suites and
spends $50,000 fixing it, that would be a repair.

And, if one had a rental for five years and the roof needed $6,000 of
repairs and a decision was made to spend $12,000 and raise the roof to sneak
in an attic room and get more rent, the $12,000 would usually be considered
an improvement although the general accepted method is to deduct the amount
that it "could have" been repaired for and add the difference to the ACB.

Partnerships and losses are another thing. It is not unusual for partners
to work together and split the results in a manner that is not consistent
with the strict ownership but which fits their own perception of who did the
most or who put in the most, etc.

When one partner covers all the losses, it is not unusual for that partner
to take all the expense. And, in my 42 years in this business and the
administration of over 700 offices at one time, I have never seen the CRA
change a partnership percentage. My answer is that one MUST split the
profits or losses now if the property is carrying itself and if both parties
are putting in equal amounts.

Remember that one partner may be putting in "sweat labour" and the other may
be putting up the cash.

I am however, sending this out to the CENTAPEDE, and lists to see if anyone else has an "official" take which
I have missed. I, for one, would appreciate any contrary opinions and


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