selling rental, capital gains options

QUESTION:

I started building a house for myself in Canada and then married an American and moved to the USA. The next year I finished the house and have rented it out for 9 years. If were to move into it for a year but would travel abroad much of that time, would I be able to avoid the capital gains tax when I sell a year later
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david ingram replies:

The house has been subject to Canadian rental tax returns under section 216(4) each year.  I hope you have reported it on form T776 and your T1 return in Canada and then converted the figures to US dollars and reported them again on scheule E of your 1040.

You do NOT escape Canadian or American Capital gains tax by moving into it.  The second you move in, you have done a deemed disposal in Canada and are subject to Capital gains tax in Canada and owe that tax on your next tax return.  If you make an election under section 45(3) you can delay 'paying' the tax until the actual sale but you still trigger it the day you move in.

These older questions might help.
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,


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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 by 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 and the amount put on line 127 of the T1 General Canadian Tax return.  You then make an election to defer paying 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 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 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.




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