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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

May 19, 2019 | Hoovered

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

 

Back when Victoria was the Regina nobody paid capital gains tax. No income tax, either. But property taxes were common. Plus customs duties, tithes and even (sometimes) a tax on windows (one reason old houses of a certain period have so few).

These days we tax everything that moves. ‘Carbon’ is the latest. Taxes are due when you make money, spend it, save or invest it. They come with owning real estate, plus when you buy or sell it. And lately there’s been a sizeable amount of confusion about the latter.

For the past few years Canadians have had to report residential real estate transactions and prove they were entitled to an exemption from capital gains tax on a principal residence. Fine. You know what a PR is, of course. House, condo, cottage, cabin, co-op – whatever you normally and habitually live in. During any one year you can designate a property as the PR and pocket profits from its sale without adding half to your taxable income.

Almost.

A problem arises with rental suites. In fact in Friday’s post when I suggested a confused moister pay her parents rent for carving out a separate space in the family home, the CRA auditors who read this pathetic blog objected. They reminded us that having a rental suite could screw over your chances of a tax-free sale if alterations were made to the house to accommodate the suite (like adding a bathroom or putting in an entry door). True enough. The tax-free status is kaput as well if you claim capital cost allowance (CCA) on a property or if you rent out most of your house and live in only a portion of it.

(In this case – in the real world – modifying a home to shelter an adult child who also happens to gift her parents money to share monthly expenses is not what the CRA cops are worried about.)

As you might know if you’ve ever deal with the revenuers, the rules are fluid, gray, fuzzy and subject to continuous change by both statute and case law. The safest course of action is to not rent out any space in your house. If you do, you must declare the rent and add it to your other sources of income, taxed at your marginal rate. That’s a no-brainer. Not declaring it is tax evasion. If caught, you will fry.

More confusing is this capital gains exemption thing. It’s been assumed for a long time that if you (a) made no physical changes to your property in creating the suite, (b) claimed no CCA and (c) the rental activity was ancillary to the main purpose of the house – your living there – then no erosion of your principal residence exemption from capital gains would apply.

Well, not so fast.

Turns out a recent court case has set the bar lower. A judge ruled a guy with a house outfitted with a basement suite that he never rented, took no income from nor ever offered to any tenant or guest had to pay capital gains on that entire level of his place when he sold. The reason came down to the definition of a home. The judge said it’s where you hang and carry out the daily functions of living. An empty suite (even if in the same building) that an owner does not use therefore doesn’t form part of the home. Any profit made on the real estate must be apportioned to the two areas of the house – the residential part and the unused suite. One tax-free, the other taxable.

Suites are epidemic now, of course. Given the cost of real estate, hauling in a renter is the only way a lot of people can swing home ownership. Vancouver, for example, has the highest proportion of residential suites in North America. But it’s probably a safe bet a huge whack of these amateur landlords are also tax cheats, failing to report the income they use for mortgage payments and property tax. The CRA has one of its famous ‘projects’ set up to ferret out and slap around such households. The interest and penalties – atop income tax owing – can be enough to ruin your day. Or year.

As for capital gains, you can only claim the exemption on a PR by filing out the schedule attached to your personal tax return. Be aware it’s a legal document. No do-overs allowed. And now that all addresses are catalogued with the revenue cops, any property with a rental history is known.

When the principal residence exemption registry was announced the feds fibbed, saying it was another safeguard against foreign owners. But obviously not. In the years to come you’ll understand much better why governments want to know everything about your real estate.

Victoria would not be amused.

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May 19th, 2019

Posted In: The Greater Fool

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