tax implications of transition between existing and future principal residence -
An old friend George Carlin died today , June 22, 2008 -
George lived with me for two months in 1963 in Regina and Winnipeg when he performed at the Fourth Dimension Coffee Houses just after breaking up with his former partner Jack Burns.
Farewell to the Hippy Dippy Weatherman
david ingram
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QUESTION: Hello, I know you are very busy but I would be extremely grateful for your advice on my specific issue. In 2006 we decided to downsize, so we signed a pre-construction apartment contract in downtown Vancouver. We got a mortgage and completed the purchase about a month ago. Unfortunately we have not been able to sell our existing house yet. Please note that the apartment has appreciated in value since we signed the contract in 2006.The questions are: 1. If we rent the apartment while waiting to sell our house, what would be the short term and long term tax implications? More specifically: 2. Can we deduct the mortgage interest and maintenance costs of the apartment from the rental income? 3. If we do the above deduction, and eventually move to the apartment, would we have to pay capital gains tax if we have to sell the apartment after a few years time? If so, what would be the cost basis? 4. How can we avoid becoming liable for future capital gains tax on the apartment? What measures should we take? 5. I don’t expect the price of our house to go up for the next year or so. Based on this expectation, should we file to elect the apartment as our principal residence while we still live at the house and waiting for the sale of our house? If we do this, while renting the apartment, would we become liable for capital gains tax on the future sales of the apartment? 6. What is the most tax efficient solution? Many thanks,----------------------------------
david ingram replies;
Too busy to give this justice. I have included a couple of other answers which are also on target
'
1. see older question
2. yes and the property taxes - go to the CRA website and read form T776
3. yes - see the older questions - taxable part would be the difference between what you paid for it and its value the day you moved in.
4. get a divorce. you move into and live in the apartment as your principal residence, your spouse can keep the other -- (a little tongue in cheek but it would work.
5. You have to have lived in the apartment to claim it as your principal residence under section 45(20
6. see 4
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My question is: Canadian-specific
QUESTION: Hello
My husband and I have recently bought a mobile home on an acre in Nelson to move to in a few years when we find work there, or much later when we retire. We currently live in a rented apartment near Vancouver as we work in town. Our mobile home is rented out to tenants and we intend to let them stay until we would like to move to Nelson. It is the only home that we own but it is rented out until we can move there. Can you let us know how that would affect us in terms of Capital Gains? I know that each year we will have to claim the rental income and write off our costs for the mobile home / land against it. Thank you very much for your feedback.
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david ingram replies:
When you move into the former rental, it is considered a deemed disposal and re-acquisition. Capital Gains tax is due and payable on any increase in value at that time.
UNLESS
If while renting, you did NOT claim CCA (Capital cost Allowance) or depreciation on the T776 (rental schedule), you can defer paying the tax at that time though.
When you do move in, calculate the increase in value and report Half on schedule 3 of your return and half on schedule 3 of your husband's return That schedule will, in turn, result in one half of the half being put on line 127 of your return as taxable income.
You can now write a letter to the Tax office stating: " I hereby elect to defer paying the tax triggered by my moving into my rental property under Section 45(3) of the income tax act."
You then write the amount on line 127 on line 256 where it is subtracted from taxable income. Write - see election letter beside line 256.
These older Questions are in the same vein.
My question is: Canadian-specific
QUESTION: We in the process of purchasing a house in Penticton and will rent it out, retire (in about 4 years)and move into it ourselves. If we live there for 2 or more years are we liable for capital gains for the period we collected rental income? What type of home insurance is best for a rental property? What are your thoughts re the real estate market in the Okanagan in the next five years - steady growth or a slump after "2010"? Many thanks,
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david ingram replies:
You are liable for capital gains income tax for the period you rented it out. In fact "When you move into the house", you will trigger a capital gains tax because of a change in use from a business use to a personal use.
The good news is that you can make an election under Section 45(3) of the income tax act to defer paying the tax until you actually sell the property. To make the calculation, fill in schedule 3 and put the taxable profit on line 127 of your T1. then deduct the same amount on line 256 under Section 45(3).
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SUGGESTED PRICE GUIDELINES - May 17, 2008
david ingram's US / Canada Services
US / Canada / Mexico tax, Immigration and working Visa Specialists
US / Canada Real Estate Specialists
My Home office is at:
Calls welcomed from 10 AM to 9 PM 7 days a week Vancouver (LA) time - (please do not fax or phone outside of those hours as this is a home office) expert US Canada Canadian American Mexican Income Tax service help.
$1,700 would be for two people with income from two countries
Catch - up returns for the US where we use the Canadian return as a guide for seven years at a time will be from $150 to $600.00 per year depending upon numbers of bank accounts, RRSP's, existence of rental houses, self employment, etc. Note that these returns tend to be informational rather than taxable. In fact, if there are children involved, we usually get refunds of $1,000 per child per year for 3 years. We have done several catch-ups where the client has received as much as $6,000 back for an $1,800 bill and one recently with 6 children is resulting in over $12,000 refund.
Email and Faxed information is convenient for the sender but very time consuming and hard to keep track of when they come in multiple files. As of May 1, 2008, we will charge or be charging a surcharge for information that comes in more than two files. It can take us a valuable hour or more to try and put together the file when someone sends 10 emails or 15 attachments, etc. We had one return with over 50 faxes and emails for instance.
david ingram's US / Canada Services
US / Canada / Mexico tax, Immigration and working Visa Specialists
US / Canada Real Estate Specialists
My Home office is at:
4466 Prospect Road
North Vancouver, BC, CANADA, V7N 3L7
Cell (604) 657-8451 -
(604) 980-0321 Fax (604) 980-0325
North Vancouver, BC, CANADA, V7N 3L7
Cell (604) 657-8451 -
(604) 980-0321 Fax (604) 980-0325
Calls welcomed from 10 AM to 9 PM 7 days a week Vancouver (LA) time - (please do not fax or phone outside of those hours as this is a home office) expert US Canada Canadian American Mexican Income Tax service help.
pert US Canada
Canadian American
Mexican Income Tax service and help.
David Ingram
gives expert income tax service & immigration help to non-resident
Americans & Canadians from New York to California to Mexico
family, estate, income trust trusts Cross border, dual citizen - out of
country investments are all handled with competence & authority.
Phone consultations
are $450 for 15 minutes to 50 minutes (professional hour). Please note
that GST is added if product remains in Canada or is to be returned to
Canada or a phone consultation is in Canada. ($472.50 with GST for in
person or if you are on the telephone in
Canada) expert US Canada Canadian American
Mexican
Income Tax service and help.
This is not intended to be definitive
but in general I am quoting $900 to $3,000 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.
$1,200 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
$3,000 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 $200.00 up. However, if
you have a stack of
1099, or T3 or T4A or T5 or K1 reporting forms, expect to pay an
average of $10.00 each with up to $50.00 for a K1 or T5013 or T5008 or
T101 --- Income trusts with amounts in box 42 are an even larger
problem and will be more expensive. - i.e.
20 information slips will be
at least $350.00
With a Rental for $400, two or three
rentals for $550 to $700 (i.e. $150 per rental) First year Rental -
plus $250.
A Business for $400 - Rental and
business likely $550 to $700
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 $900 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 for seven years at a time will be from $150 to $600.00 per year depending upon numbers of bank accounts, RRSP's, existence of rental houses, self employment, etc. Note that these returns tend to be informational rather than taxable. In fact, if there are children involved, we usually get refunds of $1,000 per child per year for 3 years. We have done several catch-ups where the client has received as much as $6,000 back for an $1,800 bill and one recently with 6 children is resulting in over $12,000 refund.
Email and Faxed information is convenient for the sender but very time consuming and hard to keep track of when they come in multiple files. As of May 1, 2008, we will charge or be charging a surcharge for information that comes in more than two files. It can take us a valuable hour or more to try and put together the file when someone sends 10 emails or 15 attachments, etc. We had one return with over 50 faxes and emails for instance.
This is a
guideline not etched in stone. If you do
your own TDF-90 forms, it is to your advantage. However, if we put them
in the first year, the computer carries them forward beautifully.
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