Calculating Capital Gain on PR Change of Use

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beaconhill
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Joined: Sat Oct 25, 2014 10:42 am

Calculating Capital Gain on PR Change of Use

Post by beaconhill »

2004 - Built house and moved in (no land costs, as property was subdivided).
2005 - Moved out and changed use to rental property.
2009 - Final year of designating house as a principal residence (because house was eligible to be declared a PR for 4 years after change of use).
2017 - Moved back in.

For simplicity:
2004 - Cost $100,000 to build house.
2005 - House worth $200,000.
2009 - House worth $400,000.
2017 - House worth $$500,000

Do I calculate the gain:

$100,000 to build house, $500,000 fair market value when moved back in.
Gain of $400,000.
House was designated as a PR for 6 of 13 years or 46% of the time, so 46% of the gain or $184,000 is exempt from capital gains taxes.
Pay capital gains taxes on $216,000.

Or

House was PR from 2004-2009 so not subject to capital gains taxes during this time.
House was worth $400,000 when use changed to rental property in 2009.
House was worth $500,000 when use changed again, back to PR.
So pay capital gains taxes on $100,000, the amount the house appreciated when it was a rental property, and not a PR.

Of course I like scenario 2, and it also seems the most fair way to be taxed.

Thank you in advance for any comments.
nelsona
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Re: Calculating Capital Gain on PR Change of Use

Post by nelsona »

This is a forum for cross-border taxes. There are plenty of Cdn tax sites that can help you.
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nelsona
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Re: Calculating Capital Gain on PR Change of Use

Post by nelsona »

If you left Canada at any time during this period, none of that time can be considered PR, even during the 4 years after change of use declared (which is not useful for emigrants in any event).
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
beaconhill
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Joined: Sat Oct 25, 2014 10:42 am

Re: Calculating Capital Gain on PR Change of Use

Post by beaconhill »

nelsona wrote:
> This is a forum for cross-border taxes. There are plenty of Cdn tax sites
> that can help you.
Sorry, I left that out of my post. I'm a US citizen living in Canada. So the way I calculate the capital gain taxes is different in both countries. But for the US side, I think I understand how to calculate it. I'm just confused about which way to proceed in Canada. I did not reside outside of Canada for any of the time period mentioned.
Thank you.
nelsona
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Re: Calculating Capital Gain on PR Change of Use

Post by nelsona »

There is a good discussion of change of use and 45(2,3) here:
https://www.taxtips.ca/personaltax/prop ... einuse.htm
It depends if you made the 45(2) election in 2005.
If you didn't, your 100K gain until 2005 is taxfree by PRE, and you are now on the hook for the gains since then: $300K
If you DID, then you get the one year that is was your PR, plus the 4 years from the election, plus standard one year for the formula, but you calculate the gain based on the entire ownership period: 400K*(7/13) = $215

I believe in both situations you can defer tax by making a 45(3) election until the property is sold.

IRS gains will be determined only at selling, plus recapture of depreciation.
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nelsona
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Re: Calculating Capital Gain on PR Change of Use

Post by nelsona »

and if you did make the election in 205, remember that you cannot have used the PRE for 2005-09 on any other home.
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beaconhill
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Re: Calculating Capital Gain on PR Change of Use

Post by beaconhill »

nelsona wrote:
> and if you did make the election in 205, remember that you cannot have used
> the PRE for 2005-09 on any other home.
Thanks very much. I did not make the election in 2005, but am in the (long) process of making the case to CRA that I be allowed to file a late election. Yes, I understand the +4 years has conditions, and is not automatic.
beaconhill
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Joined: Sat Oct 25, 2014 10:42 am

Re: Calculating Capital Gain on PR Change of Use

Post by beaconhill »

Also, doesn't scenario 2 seem more reasonable because a change of use is a deemed disposition? It's like the house sells and is re-purchased each change of use. And the clock should re-set. In this case there has been a use, a change of use, another change of use in 2017, and there will be at least one more change of use when the house is actually sold down the line.
nelsona
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Re: Calculating Capital Gain on PR Change of Use

Post by nelsona »

It may seem reasonable to you, but the price you pay to use the 4 year election is that the entire history is used to determine the gain. THAT seems reasonable to me. It avoids trying to "stack" all the gains into the years when it could be considered your PR, which is essentially your scenario 2. it seems more reasonable to say well you rented it for 12 years and we will give you a break on 5 of those years, but an average five.

There will not be another "change in use" just because you sell. Change in use is always deemed (fake) sale.
There are only 2 change in use events: personal-to-income, and income-to-personal. Only personal-to-income can you "45(2) - elect to ignore/delay" the deemed sale for 4 years. If you don't do this, you are on the hook from the day you changed for the gain. That is why it was important for you to make the election back then.
Income-to-personal, there is no avoiding the deemed sale. the best you can do is delay payment until actual sale, using 45(3).
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
beaconhill
Posts: 30
Joined: Sat Oct 25, 2014 10:42 am

Re: Calculating Capital Gain on PR Change of Use

Post by beaconhill »

nelsona wrote:
> It may seem reasonable to you, but the price you pay to use the 4 year
> election is that the entire history is used to determine the gain. THAT
> seems reasonable to me. It avoids trying to "stack" all the gains
> into the years when it could be considered your PR, which is essentially
> your scenario 2. it seems more reasonable to say well you rented it for 12
> years and we will give you a break on 5 of those years, but an average
> five.
>
> There will not be another "change in use" just because you sell.
> Change in use is always deemed (fake) sale.
> There are only 2 change in use events: personal-to-income, and
> income-to-personal. Only personal-to-income can you "45(2) - elect to
> ignore/delay" the deemed sale for 4 years. If you don't do this, you
> are on the hook from the day you changed for the gain. That is why it was
> important for you to make the election back then.
> Income-to-personal, there is no avoiding the deemed sale. the best you can
> do is delay payment until actual sale, using 45(3).
Makes sense. Thank you!
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