In 2003 my wife and I decided to immigrate to Canada from the…

Question

In 2003 my wife and I decided to immigrate to Canada from the UK as soon as we
could obtain a permanent residence visa for Canada and sell our business and
home in the UK.

We bought a property in West Vancouver as our intended home in May 2003. Our
application for Permanent Residence Visa under the Investor Category was
submitted during 2003 and granted in September 2004. After several aborted
negotiations, we sold our business in January 2005 and our entry as Landed
Immigrant into Canada was April 2005. Our UK home finally sold in June 2006 and
we moved permanently to Canada also in June 2006 and into West Vancouver home in
August 2006 where we lived continuously until June 2011 when we sold our home to
buy another in West Vancouver.

From May 2003 to August 2006 our West Vancouver home was let to tenants and we
submitted Tax Returns to Canada Revenue of our rental income. We did not claim
for depreciation. The property was completely re-roofed with new guttering
during this tenanted period which was not claimed as an expense against rental
income.

Since moving into our home we have spent considerable monies renovating our home
which has accelerated its appreciation in value well ahead of its 2006 value.

I would be most grateful if you could assist in calculating our capital gains
liability.

Debra · Accepted Answer

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Debra · Answer

Debra Thal (username) :

So the tenants were there for 3 years and then it was your principal residence
until now, is that it?

Debra Thal (username) :

I don't suppose you had it appraised when you moved in, did you?

Customer:

Yes, the tenants were there from when we purchased in 2003 through until, we
gave them notice and, we moved in 2006. No we did not have the house appraised
in 2006, but, I was speaking to a local firm of appraisers recently, who told me
that they would be able to assess a value in whatever month in 2006. We bought
the house for $1,050,000 in 2003, it was worth about $1,600,000 in 2006 and we
have sold for $2,800,000. Renovation costs amount to $300,000 of which $45,000
was spent while tenanted but not claimed as a rental expense.

Debra Thal (username) :

Basically the way it works is that you pay capital gains tax on only part of the
gains.

Debra Thal (username) :

You do not have to pay on any gains from 2006 until the present because then the
house was your principal residence.

Debra Thal (username) :

And you can also subtract capital improvements again pro-rated.

Debra Thal (username) :

So long as the appraising company is legitimate and can give you a report the
CRA will likely accept their value.

Debra Thal (username) :

I would suggest checking with your accountant to ensure he/she agrees that
whatever the company does is adequate.

Customer:

I do not understand quite how this will work. If we take a 2006 value how do we
apportion selling costs? Pro-rata? In this case, I assume that the only capital
costs that could be deducted would be the $45,000 spent prior to our occupation
as principal residence in 2006?

Customer:

Actually the BC Assessement as at 01/07/2006 was $1,504,000. Legal fees,
inspection fees and property tax on purchase amounted to $24,396. I estimate
realtors' commission and legal fees on selling to be circa $100,000.

Customer:

When I spoke with Canada Revenue they told me to complete a form T2091. This
arrives at a pro-rata of 7/9ths of the total gain being exempted as principal
residence. This appears to give a lower captal gains tax figure payable than
trying to agree a 2006 valuation.

Debra Thal (username) :

When there is a change of use of your rental property to your principal
residence, you are deemed by law to have sold it and reacquired it as your
principal residence.

The sale may give rise to a capital gain or a capital loss but in your case
there was a gain, of course.

You could have paid the tax when you moved in but presumably you elected (under
Subsection 45(3) of the Income Tax Act) to defer the reporting of the gain until
you subsequently sold the property.

Debra Thal (username) :

So there was a deemed disposition when you moved in, at fair market value, and
you must pay capital gains tax on the gains.

In 2003 my wife and I decided to immigrate to Canada from the…

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