Question about rental property and deemed disposition

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chronusfree68
Posts: 10
Joined: Wed Feb 23, 2022 8:59 am

Question about rental property and deemed disposition

Post by chronusfree68 »

Dear hive-mind:

Happy holidays!

We need some help on the Canadian side (CRA) of the tax requirements on the following scenario --

- Canadian nonresident owning a Canadian property and renting it out at arm's length to the market in 2021.
- Nonresident became resident on August 14, 2022.
- Rental agreement ended September 30, 2022.
- Resident (owner) moved into property on October 17, 2022.

Are the following statements correct/accurate regarding the Canadian side of the equation?

1) In 2021, there's no filing requirement with the CRA. If the nonresident wants excess withholding back from the CRA, she should file T776 + 1159 + 5013-SA within two years of 2021.
2) In 2022, she should file a full T1 by April 30, 2023. She will be taxable on worldwide (incl. Canadian rental) income from August 14 onwards, but will only be taxable on the net Canadian rental income prior to August 14.
3) There is a deemed disposition event on the real estate property occurring on October 17, 2022 which she should get fair market value on.
4) Any capital gains from this deemed disposition can be deferred for the duration of her primary residence until the point that there is another deemed disposition event (i.e. no longer a primary residence), in which case she has the option of paying taxes on the gains UP TO October 17, 2022 (primary residence date), OR the total capital gains since real estate purchase pro-rated by the number of days this is not her primary residence, versus the number of days this is her primary residence.
5) Any capital losses from this deemed disposition can be realized immediately in the taxable year 2022, and it is in her financial interest to do so if she wants to reduce other taxable income.

Thank you!
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Question about rental property and deemed disposition

Post by nelsona »

1. Assuming she had 25% rental income withheld and submitted to CRA MONTHLY, then no 216 return is necessary. However, 5013 is not filed (unless she had other CDn-source income which should be taxed on a return rather than flat-taxed at source). Only T1159.
2. Again, assuming she has paid the 25% MONTHLY withholding tax on the rental income, she will file a regular return, with an arrival date, and report only world income from after that date.
3.Yes. You are describing "change of use" rules.
4. Correct. The calculation is done by month, and you get an extra year of "residence" if you wait until selling.
4. You could trigger the loss, but this will lower the basis for the next disposition, raising more taxable income in future. if you are interested in lowering her tax, have the 213 returns filed for 2021 and 2022.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
chronusfree68
Posts: 10
Joined: Wed Feb 23, 2022 8:59 am

Re: Question about rental property and deemed disposition

Post by chronusfree68 »

Thank you nelsona for the very thoughtful comments. A few follow-up questions (more technical in nature) --

1) Shouldn't all non-resident returns, even those that only have rental income in Canada, declare (for informational not taxable purpose only) their worldwide income on a T1 Schedule A (aka 5013-SA Schedule A)? Same with T776 which seems to go with hand-in-hand T1159 in providing the details of the rental expenses, etc. We understand that the full nonresident T1 is not necessary but it looks like the above-mentioned three forms should be submitted (CRA is accepting faxed returns for now) as a group in its stead.

2) In this case, does a regular full T1 return cover both part of the year where she is a nonresident and part of the year where she is a resident? That is, a full T1 return will replace T1159 which will not be filed in this case (2022). Is that correct? Or is it necessary to split the tax year into T1159 for January 1 - August 14, followed by a full T1 return from August 14 onwards?
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Question about rental property and deemed disposition

Post by nelsona »

1. No, they only file a non-resident return if they have a very specific type of Cdn income. CRA is not interested in your world income when you are no longer resident, unless you are filing a 217 election, or in the year of your departure or return. As for T776, of course you file this. That is not a return. I was saying you only had to filer a 216 return. Whatever other docs you need to file for that should be included, but not another non-resident return.

2. You asked if the pre-arrival rental income would be included on her T1. No, it is not. If you elect to file a 216 return, it will be for the portion before arrival. You will have to split the income and expenses for the calendar year, between the 216 return (pre-arrival) and the T1 (post-arrival).
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
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