Tax Tip Thursday

The last couple of weeks, we talked about people splitting up. So this week I thought I would talk about something a little happier!

I have already happened on a few of these, too, which is nice to hear.

The Situation

Sometimes, when a couple gets together, they might decide to move in together after a period of time. One or both might own a house or condo. Sometimes, one of the strategies is to rent one of the places and live in the other. This type of decision applies to many situations, but it always boils down to changing the use of your principal resident to a business or commercial use.

As a result of deciding to rent out your house that you own, you now have what is called “A change in use” of your property and specifically your principal residence. And, most importantly, a deemed disposition. As most people know, your principal residence does not attract any capital gains tax when you sell it and so at that time there is no tax impact. BUT, since there would now be a deemed disposition, your property would no longer be your principal residence and would therefore be subject to capital gains from that point forward.

However, there is an opportunity to defer or reduce that capital gain under the right circumstances.

The S.45 (2) Election is an important tax planning tool is available under S.45(2) of the Tax Act, which allows a taxpayer to make an election in their tax return to be deemed not to have begun to use a property for commercial or business purposes.

There are conditions, and you have to be sure to pay attention to them as they can eliminate the possibility of utilizing the election:

1. You cannot claim CCA/depreciation on your rental property
2. You have to report the net rental or business income you earn
3. You do not designate any other property as your principal residence
4. You are a resident or deemed to be a resident of Canada

It is also important to make the election in the year that the change in use occurs.

What if I miss the Deadline?

While the CRA may allow late elections requests even after the change in use of property has already occurred, penalties may apply. Specifically, S.220 (3) of the ITA requires taxpayers to pay the lesser of the following:

• $8,000; or
• $100 for each complete month from the election’s original due date to the date the application is made in a form satisfactory to the CRA.

So be sure to consult with us as soon as you’re considering the change! It is always going to be better to plan your tax situation rather than just let it occur and hope you can change the outcome after the fact.

A Side Note…

If you are a corporation with a December 31 year end, your taxes are due next week (June 30)! Penalties kick in if you miss the deadline! If you haven’t filed them yet, contact our office right away and we will get you straightened out in time.

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.