capital gains on primary residence - $500, 000 tax free on sale of business in Canada - Fedel Saccomanno tax case

QUESTION:

We are planning to travel and stay on away from home for up to 2 years on Vancouver Island, if we decide to sell at the end of that time will our house still be considered our primary residence? Also - someone told me that if I've ever used a room at home as an office that I have to pay capital gains on that portion of the house sale, is this true? Question Number Three - I sold my business of 42 yrs, not incorporated, and want to know if I will have to pay capital gains there. I received 100 thousand down and am owed 85. Thanks, 
xxxxxxx
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david ingram replies:

1.   If the house is empty, it will be tax free if it is the only one you own.  If it is rented, you can make an election to keep it as you r principal tax free residence for up to 5 years by stating

"I hereby elect to declare the home at 1234 xxxxx street, anywhere, XX to be my principal residence even though I do not ordinarily inhabit it.  If you are just on vacation or trying out another place, the election is good for 4+1 years.  If you were transferred by your company to another city, the election is good for as long as you stay in the transferred employment,

2.   Using a room absolutely makes that portion of a house taxable in the USA.  As a consequence, I rarely claim an office in the home on US tax returns.  However, in the Fedel Saccomanno case in Canada, it is clear that even renting out two thirds as in a triplex does NOT make it taxable. see *** below..
 
3. If the business was incorporated, you can claim up to $500,000 of profit tax free,.  If the business was a proprietorship, the sale is subject to capital gains tax,

If it was a proprietorship and you are kicking yourself for not being incorporated, do not get too excited.  i almost NEVER let a client buy the business as a corporation because the purchaser gets a lousy tax break on the purchase.  When selling a corporation the purchase price is usually dropped about as much as the tax saved by the seller so that the purchaser stays even.

In my experience, about the only time a Canadian does get to sell their Canadian corporation for the tax free capital gain, is when it is a one or two person software company selling out to a public company who wants control of the asset to raise money on the stock exchange.  And then, it is likely a $4,000,000 sale with $500,000 or it being tax free and insignificant in the whole picture.


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.




>>
>> QUESTION:
>>
>> Hi, 
>>
>> Last year, we rented out our condo in Vancouver.  The
>> plan then was to have the rent cover our mortgage
>> payments for the 12 months that we would be away.  A
>> short term solution.
>>
>> Now, we are planning to be away from BC for a longer
>> period of time (approx. 2 years) and wish to sell the condo
>> in the middle of the year, as we are unable to rent the
>> condo for any longer due to strata council by laws.
>>
>> 1) If we sell the condo when there has been a tenant living
>> in it for 12 months, will we pay capital gains?
>>
>> 2) What are our best options to avoid paying this tax?
>>
>> 3) If capital gains would be owed, for how long would we
>> have to make the unit our principal residence again before
>> we can sell it and not pay CGT?
>>  
>> Thank you,
 _________________________________________________________________
   
david ingram replies:
 
If you filed a section 45(2) election with your first year's rental, you 
can rent the condo out for up to 4 years (plus 1 in the calculation) 
without incurring capital gains tax if you have not bought another 
residence that you are living in.
 See Below:
 
My question is: Canadian-specific

QUESTION: Dear Mr. Ingram,
I bought a house in the December of year 2000, lived there till the end of December 2000 (3 weeks) and started to rent it out on January 1, 2001. I filed the election 45(2) to claim the house as my primary residence for years 2001, 2002, 2003 and will do it for 2004.
I do not claim a depreciation for those years.
I want to sell the house now. Do I need to move in house first in order to avoid the payment of the capital gain taxes. For how long I have to stay there to be eligible for not paying the capital gain taxes on sold house if I need to move in.

Thank you in advance for you help,
----------------------------------------------------------
david ingram replies: 
 
First I am going to repeat your old question from last July and my answer.
 
My question is: Canadian-specific

QUESTION: Hi, David!
I would like to know is it possible to use the election under the section 45(2) again if the old house is sold and the new one is bought. Can it be used unlimited number of times by the condition that it is used for each house only once.

Thank you  
---------------------------------------------------------------------------
David Ingram replies:
 
Section 45(2) is intended to allow people to try something out.  This means that if you move to a rented condo for a couple of years and rent your house out, you can move back into the house without suffering a capital gains tax under section 45(2).
 
Since it was passed on June 17, 1972, (32 years ago now) I have never seen it used more than twice by one person.
 
Does not mean it has not been used more than twice in thirty years, it just means it is unlikely.
 
There is no numeric restriction but if you are moving in and out of houses, the CRA will treat you as a trader and tax you at full rates.
 
----------------------------------------------------------
Now, to answer this question.  Section 45(2) is NOT something you can plan to use.  In other words, your living in the house for three weeks and renting it out and filing a section 45(2) election does NOT make it tax free if you bought the house to rent and not to live in as your personal principal residence.
 
Your question indicates to me that you are trying to beat the system and did not buy the first house to live in and unless you can show the tax office that you moved every stick of furniture in and really intended to live there, the CRA will not allow it to be sold tax free.
 
This year, a new policy of the CRA is that they wish form T2091 to be filed with every tax return where a personal house was sold during the year.
 
If it was your residence and you genuinely intended to live there and were transferred of suddenly got married or could not stand your neighbour or lost your driver's licence or suffered some other disaster that caused you to "HAVE TO" move suddenly, filing section 45(2) will make it tax free provided you did not also own another house that you did live in.   If you did own another house that you actually lived in, claiming the house you have filed the 45(2) election for as tax free, will MAKE THE HOUSE YOU ACTUALLY LIVED IN TAXABLE.
 
If you have a genuine 45(2) election, you do not need to move back in.  If it is not a genuine 45(2), moving back in will TRIGGER a tax bill as you move in.
 
You need a consultation with someone who knows the rules before you make a mistake. I am available in person or by phone at a fee of $350.00 minimum for an hour but not until November now.
 
As many know, I charge this for US / Canada tax an immigration advice as well.  I am not alone though.
 
If you have a tough US immigration question to ask or one that  I cannot deal with (remember I do Immigration AND tax) Joe grasmick is the place to g for a telephone consultation.  His fee is $295.00 per HALF hour and you can get hold of him at http://s1.amazon.com/exec/varzea/ts/exchange-glance/Y01Y4838730Y0462867/104-8053170-6203936
 
I have sent two out of town people to him in the last month where it was obvious to me that the people needed a lawyer as opposed to a consultant..
 
If you want a free answer for a couple of minutes, remember
 

Answers to this and other similar  questions can be obtained free on Air every Sunday morning.
 
Every Sunday at 9:00 AM on 600AM in Vancouver, Fred Snyder of Dundee Wealth Management and I will be hosting an INFOMERCIAL but LIVE talk show called "ITS YOUR MONEY"
 
Those outside of the Lower Mainland will be able to listen on the Internet at
 
www.600AM.com
 
Local phone calls to (604) 280-0600 - Long distance calls to 1-866-778-0600.
 
Old shows are archived at the site.
 
***

On April 6. 2008, David Ingram wrote:

It is very unlikely that blind or unexpected email to me will be answered.  I receive anywhere from 100 to 700  unsolicited emails a day and usually answer anywhere from 2 to 20 if they are not from existing clients.  Existing clients are advised to put their 'name and PAYING CUSTOMER' in the subject line and get answered first.  I also refuse to be a slave to email and do not look at it every day and have never ever looked at it when I am out of town.  e bankruptcy expert  US Canada Canadian American  Mexican Income Tax  service and help
However, I regularly search for the words"PAYING CUSTOMER" and always answer them first if they did not get spammed out. For the last two weeks, I have just found out that my own email notes to myself have been spammed out and as an example, as I wrote this on Dec 25, 2007 since June 16th, my 'spammed out' box has 47,941 unread messages, my deleted box has 16645 I have actually looked at and deleted and I have actually answered 1234 email questions for clients and strangers without sending a bill.  I have also put aside 847 messages that I am maybe going to try and answer because they look interesting. -e bankruptcy expert  US Canada Canadian American  Mexican Income Tax service and  help
Therefore, if an email is not answered in 24 to 48 hours, it is likely lost in space.  You can try and resend it but if important AND YOU TRULY WANT OR NEED AN ANSWER from 'me', you will have to phone to make an appointment.  Gillian Bryan generally accepts appointment requests for me between 10:30 AM and 4:00 PM Monday to Friday VANCOUVER (Seattle, Portland, Los Angeles) time at (604) 980-0321.  david ingram expert  US Canada Canadian American  Mexican Income Tax  service and help.
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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.
 
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. 

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.
 
This from "ask an income trusts tax service and immigration expert" from www.centa.com or www.jurock.com or www.featureweb.com. David Ingram deals on a daily basis with expatriate tax returns with multi jurisdictional cross and trans border expatriate problems  for the United States, Canada, Mexico, Great Britain, United Kingdom, Kuwait, Dubai, Saudi Arabia, Thailand, Indonesia, Japan, China, New Zealand, France, Germany, Spain, Italy, Russia, Georgia, Brazil, Peru, Ecuador, Bolivia, Scotland, Ireland, Hawaii, Florida, Montana, Morocco, Israel, Iraq, Iran, India, Pakistan, Afghanistan, Mali, Bangkok, Greenland, Iceland, Cuba, Bahamas, Bermuda, Barbados, St Vincent, Grenada,, Virgin Islands, US, UK, GB, and any of the 43 states with state tax returns, etc. Rockwall, Dallas, San Antonio Houston, Denmark, Finland, Sweden Norway Bulgaria Croatia Income Tax and Immigration Tips, Income Tax  Immigration Wizard Antarctica Rwanda Guru  Consultant Specialist Section 216(4) 216(1) NR6 NR-6 NR 6 Non-Resident Real Estate tax specialist expert preparer expatriate anti money laundering money seasoning FINTRAC E677 E667 105 106 TDF-90 Reporting $10,000 cross border transactions Grand Cayman Aruba Zimbabwe South Africa Namibia help USA US Income Tax Convention. Advice on bankruptcy  e bankruptcy expert  US Canada Canadian American  Mexican Income Tax service and help .

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