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.Name: EXXXXX XXXXX
My question is: Canadian-specific
QUESTION: Question:
1. Our principal residence, which used to be our cottage, is mortgage free.
2. After our son's divorce we bought a house for $123.000. We spent some
$60.000 in renovations and its estimated value is now $210.000. The house is
in our name though our son and his new partner live in it. Could we declare
it to be our principal residence though we do not live in it?
We have a $56.000 mortgage on the house. The bank tells that we can
remortgage it up to $130.000. Will we have to pay capital gains on the
$70.000+ cash that we would get? If there is tax on this amount, can we
deduct the cost of the renovations, and pay gains tax only on the $10.000?
What are the tax implications if we sell it to our son?
Currently we plan to leave the property to our son after we die which may
not be too far in the future. What amount will he be required to pay capital
gains on, the full value of the house, or the mortgage free portion of it?
3. Our other son lives in a condominium apartment, one third of which is owned
by him and two thirds by my husband and me. We want to leave it to his
exclusive possession in our will. Again, what are the tax implications after
our death?
4. How about leaving the properties, and/or our other assets, in a trust, a)
separate to each son, or as a combined estate?
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david ingram replies:
I hate to say it but you have a $700 question and if you proceed with anything
after reading this, you are unwise. However the question has interesting parts that
I will answer individually. - Talk to someone before you proceed.
If you were to come to see me for instance, I would want to see you and your spouse and
both children. Everybody's perception has to be the same here.
I have numbered the parts for ease of identification.
You would do well to read IT-120R5 which you can find at:
http://www.ccra-adrc.gc.ca/E/pub/tp/it120r5/120r5-e.pdf
1. The assumption is that this house (your former cottage) is tax free
because you live in it. However, if you have just moved into it after
twenty years of ownership and you sold another house that you owned
at the same time and claimed that house tax free, you would owe
tax on the cottage because you claimed the other one as your
principal residence for those years (see Form T2091).
2. Your son is married and over 18 so you cannot claim the
house as your principal residence. Selling it today for $210,000
would mean a capital gain of (210000 - (123000 + 60000))
$27,000.
If you were to take $70,000 out by mortgage, the $70,000 would not
be taxable. The interest would not be deductible unless you used it to buy
an income producing investment like mutual funds or another investment
property.
Having spent the day at Lion's Gate Hospital with a suspected stroke, I feel
a little mortal right now. (It was just a presciption drug interaction) If you and spouse were
to bothdie tomnorrow, your estate would owe tax on one-half of the $27,000
capital gain mentioned before.
3. I do not know why you owe two thirds. If it is really a form of mortgage, he might
get the whole thing tax free. If you really do own two-thirds and consider yourself to
own two thirds and are not just holding it in trust and are making payments, then your estate
would owe capital gains tax.
In other words, if you are showing these properties as rental properties on your tax
return, they are taxable for sure.
If you have the properties in your name in trust so that your sons' spouses do not have a claim, the properties may be tax free.
Consult with a properly qualified person.
Make sure that they understand the terms constructive trust when you talk to them.
David Ingram of the CEN-TA Group
US / Canada / Mexico tax and working Visa Specialists
US / Canada Real Estate Income Tax Specialists
108-100 Park Royal South
West Vancouver, BC, CANADA, V7T 1A2
(604) 913-9133 - Fax 913-9123 [email protected]
www.centa.com www.david-ingram.com
The question was left on www.hurock.com at:
http://www2.jurock.com/askexpert/ask.asp?aid=121&cid=63
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