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Good morning: My wife and I are considering the purchase of a mobile home, with land, for rental purposes and future resale. We will continue to live in our nearby principal residence.
I am retired. My income is from investments, a small UK pension, CPP and OAS. (I am 70, my wife is 59)
My wife has returned to work part-time, however, and expects to earn annual income of $6-$8000. Would there be any tax advantage in registering my wife as sole owner of the rental property for (a) income tax purposes and (b) capital gains tax purposes in the likely event we would be reselling the property in two or three years time?
Alternatively, we wonder if there would be any advantage in naming our son, who also is in a very low tax bracket, as owner? In either, the mortgage would have to be in both my own and my wife's names.
Could you also clarify how capital gains tax would be calculated, under present rules, if and when the time comes to sell?
I was briefly a client of CENTA but have since moved from West Vancouver to Gibsons. We will be engaging your services again for the current tax year early in 2004.
Thank you. I look forward to hearing from you.
BXXXXXXXXl
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david ingram replies:
If there is one thing I have quit guessing at lately, it is trying to outguess the grim reaper. If you could give me the dates of your demise and that of your wife and son, I could give you a 1, 2 3 answer. However, If I said, put it in your son's name, he would likely be the first to go and we would have a tax and inheritance problem.
If you are all in the income levels suggested, it does not matter whose name the unit is in. However, if the idea was to give the money to your son eventually, it should just go in his name now.
However, I expect that like most of us, you just want as much as you can retain in all possible scenarios.
I suggest that you put the property in all three names as joint tenants with right of survivorship. A further codicil or side agreement would acknowledge that the profits and ownership belonged to your wife and yourself and that your son's name was there only for estate purposes and that he could / would not pledge or sell his ownership while either your wife or yourself was alive.
The advantage is that the property is automatically theirs if you die first; automatically yours and your son's if your wife goes first and automatically his if you and your wife go together in a common disaster. There would be very little paperwork.
If each of you put money in equally, the rental profits would be split between your wife and yourself "UN:LESS" you could show that only your wife's savings and income has gone into the property.
Canada's Section 74.1 says that it does not matter whose name a property is registered in between husband and wife, the property is taxed to the one who contributed the money to buy it. So, if the down payment or whole payment came from you, the whole unit would be taxed to you even if it was all in your wife's name.
And conversely, if your wife had an inheritance and used it to buy the land and mobile and put it all in your name, the rental and any capital gains would still be taxable in her name.
Source and application of funds governs the taxation of the unit no matter whose name it is in. The names the property is registered in governs the ease of transfer upon death and make it harder to transfer if everyone is still alive because everyone has to sign it to buy and sign it to sell and you need the outside agreement to keep it as your property and have your son;s name on as a sort of trustee for himself for estate purposes.
Capital gains are now taxed at full rates of tax on 50% of the profit.
Because of your reference, I took the liberty of looking at your 2000 return. You were in a 29% tax bracket. If you had made a $20,000 capital gain $10,000 of it would have been taxable and you would owe $2,900 in capital gains tax.
At the same time, your wife was in a 23% tax bracket even though she paid no tax. If she had made a $20.000 capital gain she would have paid about $2,300 on her $10,000 of taxable capital gain.
However, you only have $10,000 room left at 29% tax and then you would have jumped up to 43%. Your wife had $25,000 left at 23% 30,000 left at 29% and then would have gone to the 43% (approximate - there are really 5 brackets now).
To make one other thing clear, both the United and Canada have a progressive rate of tax. Going to a higher tax bracket does NOT cost you more tax on the money you have already earned. The higher tax bracket only applies to the NEXT dollar earned. So if the rates were 25% on the first $30,000, 40% on the next $30,000 and 50% on the excess your tax on $60,000 would be:
First $30,000 $ 7,500
next $30,000 12,500
Total tax equals $20,000 or an average of 33 1/3%
If you earned $100,000, the tax would be: (as an example)
First $30,000 $ 7,500
nest $30,000 12,500
next $40,000 20,000
Total tax equals $40,000 or an average of 40%
However, if you make another dollar, your tax would be 50 cents and your "marginal" tax rate would be 50%
>From the tax figures above, you subtract your personal amounts which is about $1,700 minimum per person. Your personal amounts in 2001 were about $2,400 because of your pension deduction and charitable contributions.So, you had made the $60,000 in the above example, your tax would have been $20,000 less the $2,400 for a net of $17,600.
Hope this helps BXXXXXX
david ingram
David Ingram's US/Canada Services
US / Canada / Mexico tax and working Visa Specialists
US / Canada Real Estate Specialists
4466 Prospect Road
North Vancouver, BC, CANADA, V7N 3L7
Res (604) 980-3578 Cell (604) 657-8451
(604) 980-0321
New email to [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 & the author and any and all non-contractual duties are expressly denied. All readers should obtain formal advice from a competent financial, or real estate planner or advisor & appropriately qualified legal practitioner, tax or immigration specialist in connection with personal or business affairs such as at www.centa.com. If you forward this message, this disclaimer must be included."
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You may find more answers at www.centa.com
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
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