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Subject: Jurock.com 'Ask an Expert': A Question for You on Thursday,
September 25, 2003 at 16:35:27
My question is: Canadian-specific
QUESTION: My wife and I own a single family dwelling in a desirable Vancouver neighborhood which is zoned for duplex.
I am investigating the possibility of tearing down and building a duplex with the intent of selling half and retaining the other half duplex. Can you offer any tax advice?
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david ingram replies:
For some reason or other the email address did not work on this question so the sender will have to read the reply at http://www2.jurock.com/askexpert and will not get an individual reply.
I am assuming that the present house is your principal residence and that its sale would be tax free.
However, your stated intent to tear it down and build a duplex for sale is an obvious business intent.
It also seems that the value of your property today would best be described as "lot value".
Therefore, if you were to tear down the house to start a business your ACB (adjusted cost base) of the business would be the appraised value of the lot at the time.
Your building of the duplex would be a 50/50 venture with half the costs being part of the business and half of the cost being the price of the new principal residence.
When you were finished, any profit on the sale of the half duplex would be put on a T2124 form and the gross sale would go on line 162 and the net profit would be reported on line 135 of your Income tax return. Tax would be paid at your highest marginal tax rate because the income would be added on "top" of your regular income.
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The foregoing was based upon your stated intention to build and sell which by definition is a venture in the nature of trade and not a "capital" venture which would attract capital gains tax of 50% of the previous amount.
If your question had been that you were going to tear down the house and build a duplex to live in one side and rent the other out for a long time, I would be suggesting that the entire building would be your principal residence and tax free following guidelines set out in the Fedel Saccomanno case below.
In 1986, Fedel Saccomanno won the sale of his home as a tax free capital gain as his principal residence. He had bought a triplex with two units rented out, and lived in the third unit with his wife on weekends when he was not teaching at the University of Waterloo. When he did not get tenure at Waterloo, and sold the property, DNR tried to tax two-thirds of the profits. Judge Taylor ruled that the entire triplex was tax free, giving credence to my claim in my Investment Guide. In the Investment Guide, I suggest that people with duplexes and triplexes should claim the whole building tax free in spite of the fact that Bulletins IT 120R2 and R3 stated that half a duplex and two thirds of a triplex would be taxable.
The new bulletin IT120R6 is still just a guide. Since Section 54(g) allows a taxpayer to claim a house and 1.22 acres (1/2 hectare) tax free, it stands to reason that the duplex should be tax free if the building was bought or built primarily for the taxpayer's residence and the rental portion is a mortgage helper.
At one time, I talked to "Major" the head of the Income Tax Bulletin Department at Revenue Canada (CCRA) in Ottawa. He told me at the time that they knew of over 100 statements in the Interpretation Bulletins that had been reversed by the courts.
Go to www.centa.com, click on [tax guide], click on [capital gains] for about 20 pages of tax cases dealing with the difference between capital gains and straight income.
Hoping this helps and I would remind the reader that this is the kind of work we do for a living. If you are going to proceed, a good idea would be to see us for a consultation about the tax provisions, record keeping and pitfalls you should be watching out for. If so, both yourself and your spouse should attend since you are likely doing this as a joint venture.
If I am not available, George Hatton, CA and or Sonja Clark, CA, CPA, LLB are available at the same numbers.
David Ingram of the CEN-TA REALTY Group
US / Canada / Mexico tax and working Visa Specialists
US / Canada Real Estate Specialists
108-100 Park Royal South
West Vancouver, BC, CANADA, V7T 1A2
(604) 980-0321 - Fax 913-9123 [email protected]
www.centa.com www.david-ingram.com
Disclaimer: This question has been answered without detailed information or consultation and is to be regarded only as general comment. Nothing in this message is or should be construed as advice in any particular circumstances. No contract exists between the reader and the author and any and all non-contractual duties are expressly denied. All readers should obtain formal advice from a competent and appropriately qualified legal practitioner or tax specialist in connection with personal or business affairs such as at www.centa.com. If you forward this message, this disclaimer must be included."
Be ALERT, the world needs more "lerts"
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