Capital Gains on house they built - section 45(3)
QUESTION:
Thanks for taking my email.
Owned the property for 25 years, 1982-present.
Started to build house in 1988, and finished in 1992. We moved into the house in 1992. I claimed personal residence on the previous house up to 1992.
Is this what Revenue Canada wants?
Selling price $920,000.00.
Cost to build house $463,232.00.
50% of gain is $231,616.00.
$231,616.00 divided by 25 years = $9264.64.
$9264.64 X the 10 years we were not there equals $92,646.40 gain divided between two owners equals $46323.20. Assuming a tax rate of 16.6% we would both owe $7,689.65.
Would this be correct?
If so, can we write off any of the expenses up to the day we moved in? eg. Property Taxes.
Thanks very much
---------------------------
david ingram replies:
This house was never rented and represents a lot purchase plus th cost of building a house.
If i had been involved back in 1992, I would have reported any profit on the property up to the day you moved in, reported it on line 127 and then exempted it on line 256 under Section 45(30 of the tax act. I wouol dthen claim all the profit from teh day you moved in as my principal residence and pay tax on the profit from 1982 to 1992.
This is a much better calculation than what you have proposed which is the essential calculation you would end up with after filling in form T2091.
The following are similar replies as well.
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,
________________________________________________________________
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 bt 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 payimng 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!
====================================================================
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 a t ithe
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.
You can learn more about this by reading CRA Bulletin IT-533 at:
http://www.cra-arc.gc.ca/E/pub/tp/it533/it533-e.pdf
You can find out more about interest as a deduction by reading my November
2001 newsletter by going to www.centa.com, clicking on newsletters in the
top left box, click on 2001 and click on November. �
Thanks for taking my email.
Owned the property for 25 years, 1982-present.
Started to build house in 1988, and finished in 1992. We moved into the house in 1992. I claimed personal residence on the previous house up to 1992.
Is this what Revenue Canada wants?
Selling price $920,000.00.
Cost to build house $463,232.00.
50% of gain is $231,616.00.
$231,616.00 divided by 25 years = $9264.64.
$9264.64 X the 10 years we were not there equals $92,646.40 gain divided between two owners equals $46323.20. Assuming a tax rate of 16.6% we would both owe $7,689.65.
Would this be correct?
If so, can we write off any of the expenses up to the day we moved in? eg. Property Taxes.
Thanks very much
---------------------------
david ingram replies:
This house was never rented and represents a lot purchase plus th cost of building a house.
If i had been involved back in 1992, I would have reported any profit on the property up to the day you moved in, reported it on line 127 and then exempted it on line 256 under Section 45(30 of the tax act. I wouol dthen claim all the profit from teh day you moved in as my principal residence and pay tax on the profit from 1982 to 1992.
This is a much better calculation than what you have proposed which is the essential calculation you would end up with after filling in form T2091.
The following are similar replies as well.
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,
________________________________________________________________
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 bt 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 payimng 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!
====================================================================
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 a t ithe
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.
You can learn more about this by reading CRA Bulletin IT-533 at:
http://www.cra-arc.gc.ca/E/pub/tp/it533/it533-e.pdf
You can find out more about interest as a deduction by reading my November
2001 newsletter by going to www.centa.com, clicking on newsletters in the
top left box, click on 2001 and click on November. �
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