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My question is: Canadian-specific
the_email: QUESTION: I have purchased a commercial and
residential-mix building consisting of 3 residential suites and 5
office or commercial suites which generates gross revenues of
approximately $2,800.00 per month. When I took possession of the
building, I moved into one of the suites day 1 of ownership, so
use this building as my principal residence while renting the
other spaces. If I sell this building, what portion will be
considered as having a capital gains tax consequence and what
portion of my renovations/maintenance/improvements costs can be
considered as a write off? Secondly, can my labor as property
manager be taken into consideration as an expense for tax write
off purpose? I am looking forward to your reply Ozzie. Thanks in
advance:)
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david ingram replies:
Ozzie is out of town and has asked me to answer this for him.
The percentage of use to the repairs is what you would use.
Repairs to fix a rental suite or business premise would be 100%
deductible. Repairs to your suite would not be deductible at
all. Repairs to the roof, heating system or other common areas
would be deductible on a pro-rated basis based upon the personal
square footage of rental to the total space.
Your own labor is NOT a deduction.
With regard to the capital gains tax;
Bulletin IT120R6 would suggest that you would pay tax on the
percentage of space you have been deducting.
The bulletin would suggest - as an example - that if you paid
$100,000 and deducted 90% of the expenses each year against the
rental income you received, that if you sold the building for
$200,000 and made $100,000 profit, 90% or $90,000 would be
taxable.
Of course, since we only pay tax on 50% of capital gains, only
$45,000 would be taxable in that circumstance.
And, if it was a duplex, you would pay tax on half, if a triplex,
2/3rd's and if a four-plex, 3/4s.
I prefer a slightly more aggressive stance since bulletin IT120R6
is only policy and not law and the law is quite clear that your
home and up to 1/2 hectare (1.22 acres) is tax free.
It is unlikely that your building is on more than 1.22 acres so I
would start off suggesting that the whole thing is tax free if
you have no claimed CCA (capital cost allowance or depreciation)
on the building. If you have claimed CCA, I would still take the
position that the portion of the building you lived in and the
land is / was tax free.
And there is a case that gives credence to the position I have
taken - Read the Fedel Sacomanno case following in another Q & A
which means I do not have to retype everything.
QUESTION:
I'm thinking of purchasing a duplex and living in one
half/renting out the other half. Could such a duplex be
purchased in my wife's name so that the rental income could be
declared on her taxes only?(She makes less money than me and is
therefore in the lower tax brackets.)
I'm also wondering if that Saccomanno case regarding the capital
gains exemption is still good law. Haven't there been any
changes to the Income Tax Act since it was decided in 1986
designed to counter this practice? The CRA bulletin refers to
section 45(1)(c). Was that provision in existence in 1986?
===============================
david ingram replies:
no case to start with.
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.
Back to your question
There are a couple of points to be made.
1. The Duplex can be in your wife's name. However, if it is only
"your" money that pays for it, the profits or losses (as the case
may be) are yours, not your wife's - Section 74.1(1) deals with
the operating profits or losses and section 74.2 deals with the
capital gains or losses. They read as follows:
74.1. (1) Where an individual has transferred or lent property
(otherwise than by an assignment of any portion of a retirement
pension pursuant to section 65.1 of the Canada Pension Plan or a
comparable provision of a provincial pension plan as defined in
section 3 of that Act or of a prescribed provincial pension
plan), either directly or indirectly, by means of a trust or by
any other means whatever, to or for the benefit of a person who
is the individual's spouse or common- law partner or who has
since become the individual's spouse or common-law partner, any
income or loss, as the case may be, of that person for a taxation
year from the property or from property substituted therefore,
that relates to the period in the year throughout which the
individual is resident in Canada and that person is the
individual's spouse or common-law partner, shall be deemed to be
income or a loss, as the case may be, of the individual for the
year and not of that person.
Transfers and loans to minors
(2) Where an individual has transferred or lent property, either
directly or indirectly, by means of a trust or by any other means
whatever, to or for the benefit of a person who was under 18
years of age (other than an amount received in respect of that
person as a consequence of the operation of subsection 122.61(1))
and who
(a) does not deal with the individual at arm's length, or
(b) is the niece or nephew of the individual,
any income or loss, as the case may be, of that person for a
taxation year from the property or from property substituted
therefore, that relates to the period in the year throughout
which the individual is resident in Canada, shall be deemed to be
income or a loss, as the case may be, of the individual and not
of that person unless that person has, before the end of the
year, attained the age of 18 years.
Repayment of existing indebtedness
(3) For the purposes of subsections 74.1(1) and (2), where, at
any time, an individual has lent or transferred property (in this
subsection referred to as the "lent or transferred property")
either directly or indirectly, by means of a trust or by any
other means whatever, to or for the benefit of a person, and the
lent or transferred property or property substituted therefore is
used
(a) to repay, in whole or in part, borrowed money with which
other property was acquired, or
(b) to reduce an amount payable for other property,
there shall be included in computing the income from the lent or
transferred property, or from property substituted therefore,
that is so used, that proportion of the income or loss, as the
case may be, derived after that time from the other property or
from property substituted therefore that the fair market value at
that time of the lent or transferred property, or property
substituted therefore, that is so used is of the cost to that
person of the other property at the time of its acquisition, but
for greater certainty nothing in this subsection shall affect the
application of subsections 74.1(1) and (2) to any income or loss
derived from the other property or from property substituted
therefore.
S.C. 1986, c. 6, s. 38; S.C. 1986, c. 55, s. 17; S.C. 1987, c.
46, s. 25; S.C. 1994, c. 7, Sch. VII, s. 4; S.C. 2000, c. 12, s.
142.
Gain or loss deemed that of lender or transferor
74.2. (1) Where an individual has lent or transferred property
(in this section referred to as "lent or transferred property"),
either directly or indirectly, by means of a trust or by any
other means whatever, to or for the benefit of a person (in this
subsection referred to as the "recipient") who is the
individual's spouse or common-law partner or who has since become
the individual's spouse or common-law partner, the following
rules apply for the purposes of computing the income of the
individual and the recipient for a taxation year:
(a) the amount, if any, by which
(i) the total of the recipient's taxable capital gains for the
year from dispositions of property (other than listed personal
property) that is lent or transferred property or property
substituted therefor occurring in the period (in this subsection
referred to as the "attribution period") throughout which the
individual is resident in Canada and the recipient is the
individual's spouse or common-law partner
exceeds
(ii) the total of the recipient's allowable capital losses for
the year from dispositions occurring in the attribution period of
property (other than listed personal property) that is lent or
transferred property or property substituted therefor
shall be deemed to be a taxable capital gain of the individual
for the year from the disposition of property other than listed
personal property;
(b) the amount, if any, by which the total determined under
subparagraph 74.2(1)(a)(ii) exceeds the total determined under
subparagraph 74.2(1)(a)(i) shall be deemed to be an allowable
capital loss of the individual for the year from the disposition
of property other than listed personal property;
(c) the amount, if any, by which
(i) the amount that the total of the recipient's gains for the
year from dispositions occurring in the attribution period of
listed personal property that is lent or transferred property or
property substituted therefor would be if the recipient had at no
time owned listed personal property other than listed personal
property that was lent or transferred property or property
substituted therefor
exceeds
(ii) the amount that the total of the recipient's losses for the
year from dispositions of listed personal property that is lent
or transferred property or property substituted therefor would be
if the recipient had at no time owned listed personal property
other than listed personal property that was lent or transferred
property or property substituted therefor,
shall be deemed to be a gain of the individual for the year from
the disposition of listed personal property;
(d) the amount, if any, by which the total determined under
subparagraph 74.2(1)(c)(ii) exceeds the total determined under
subparagraph 74.2(1)(c)(i) shall be deemed to be a loss of the
individual for the year from the disposition of listed personal
property; and
(e) any taxable capital gain or allowable capital loss or any
gain or loss taken into account in computing an amount described
in paragraph 74.2(1)(a), 74.2(1)(b), 74.2(1)(c) or 74.2(1)(d)
shall, except for the purposes of those paragraphs and to the
extent that the amount so described is deemed by virtue of this
subsection to be a taxable capital gain or an allowable capital
loss or a gain or loss of the individual, be deemed not to be a
taxable capital gain or an allowable capital loss or a gain or
loss, as the case may be, of the recipient.
Deemed gain or loss
(2) Where an amount is deemed by subsection 74.2(1) or 75(2) or
section 75.1 of this Act, or subsection 74(2) of the Income Tax
Act, chapter 148 of the Revised Statutes of Canada, 1952, to be a
taxable capital gain or an allowable capital loss of an
individual for a taxation year,
(a) for the purposes of sections 3 and 111, as they apply for the
purposes of section 110.6, such portion of the gain or loss as
may reasonably be considered to relate to the disposition of a
property by another person in the year shall be deemed to arise
from the disposition of that property by the individual in the
year; and
(b) for the purposes of section 110.6, that property shall be
deemed to have been disposed of by the individual on the day on
which it was disposed of by the other person.
Election for subsection (1) to apply
(3) Subsection (1) does not apply to a disposition at any
particular time (in this subsection referred to as the
"emigration disposition") under paragraph 128.1(4)(b), by a
taxpayer who is a recipient referred to in subsection (1), unless
the recipient and the individual referred to in that subsection,
in their returns of income for the taxation year that includes
the first time, after the particular time, at which the recipient
disposes of the property, jointly elect that subsection (1) apply
to the emigration disposition.
Application of subsection (3)
(4) For the purpose of applying subsection (3) and
notwithstanding subsections 152(4) to (5), any assessment of tax
payable under this Act by the recipient or the individual
referred to in subsection (1) shall be made that is necessary to
take an election under subsection (3) into account except that no
such assessment shall affect the computation of
(a) interest payable under this Act to or by a taxpayer in
respect of any period that is before the taxpayer's filing-due
date for the taxation year that includes the first time, after
the particular time referred to in subsection (3), at which the
recipient disposes of the property referred to in that
subsection; or
(b) any penalty payable under this Act.
S.C. 1986, c. 6, s. 38; S.C. 1988, c. 55, s. 52; S.C. 1994, c. 7,
Sch. II, s. 51; S.C. 1995, c. 3, s. 20; S.C. 2000, c. 12, s. 142;
S.C. 2001, c. 17, s. 54.
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David Ingram again:
Therefore, if you wish to put it into your wife's name so that
she gets the profit, you have to make sure that she puts up the
money.
There are, of course, variations. You could put up the money and
initially you would pay the tax. However, as she pays you back
with her rental profits, every year, more and more would become
taxable to her.
Saccomanno is still valid as far as I am concerned. If there was
a glitch, it would be that you "might" have to pay a little tax
on the increased value of the building. However, the house and
1/2 hectare are still tax free under section 54(e).
-------------------------
David Ingram's US/Canada Services
US / Canada / Mexico tax, Immigration 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 Fax (604) 980-0325
Email to taxman at centa.com
www.centa.com www.david-ingram.com
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