My question is: Canadian-specific
QUESTION: I am planning to sell my residence and move into a revenue
property that I have owned for 2 years. Can you explain the tax
implications. It has increased in (real value0 approx. 150k since I bought
it. (5OK by assessment)
Thanks.
---------------------------------------------------------------------------
david ingram replies:
Whether you move in from France or Chilliwack, the conversion of a rental to
a personal residence triggers income tax if the property has increased in
value.
The following Q & A will explain it a bit better:
-------------
QUESTION: We are non-residents (for 13 years) and we are considering the
sell of our Vancouver condo. We realize the sale would be subject to 25%
withholding tax. If we decided not to sell and moved back to Canada in the
future, what Capital gains would we have to pay? We are trying to find out
what is the best way to dispose of our property. There is no urgency to
sell - it is being rented out through a management agency. However if we
ever did plan to move back would we be better off to sell before we return
or to sell after we resume residency?
Thanks for you help
Kind regards
the xxxxxxxxxxxx
=====================================
david ingram replies:
Interestingly, you are the third "France back to Vancouver" situation I have
had this week. And last Monday, I took delivery of a 1973 French Citroen SM
Scenario One:
If you sell your condo while a non-resident, there will be a 25% of the
profit withholding tax. There will also be a 25% withholding tax on the
amount of any CCA (depreciation) you have taken over the 13 years. For these
calculations, we cannot use Real Estate Commissions as an expense.
Then, next February, you have to file an actual tax return on which you get
to claim the Real Estate costs and that usually results in a refund.
------------
Scenario Two
You return and move in.
In this case, you have to calculate the Capital Gain from the deemed sale of
the property. This amount goes on line 127 of the tax return. THEN, if you
file an election to defer the tax under section 45(3) of the tax act, you
can deduct the amount on line 256. Using this scene, you do not pay the tax
until you actually sell the unit.
At the same time, any depreciation or CCA you claimed becomes taxable as a
recapture on schedule T776 and goes on line 126. You can NOT defer the tax
on the recaptured depreciation.
This recaptured depreciation is effectively added to the top of any other
income you have in the year in Canada. Therefore, if you moved in on Dec
15th of a year, it would be the only taxable income you had that year in
Canada and the tax rate would likely be 23% or so. If you came back 3 weeks
later and had another $100,000 of income, you would be adding the recapture
to $100,000 and likely pay 40% tax on the amount.
------------------------------------------------
If you are determined to sell before or just after returning, for Canadian
tax purposes, it would likely make more sense to sell before you return.
Of course, this is just what happens for Canada. Under Article IV of the
Canada France Income Tax treaty, you have to be reporting the rental income
in France to be exempt in Canada on your income from France.
Under Article 6, the rental income is clearly taxable in Canada first and
France second. Under the terms of Article XIII(5) the sale in Canada is
clearly taxable in France if you have lived in France for ten years or more
OR the five years immediately preceding the sale.
I do not know French law well enough but believe that they will tax the
deemed profit on sale when you leave if the property has not been sold yet.
Of course, this is NOT double taxation. France will allow a tax credit
against their tax for the taxes paid to Canada.
----------------------------------------------
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