CANADA capital gains on primary residence - $500, 000 tax free on sale of business in Canada - Fedel Saccomanno tax case

We are planning to travel and stay on away from home for up to 2 years on Vancouver Island, if we decide to sell at the end of that time will our house still be considered our primary residence? Also - someone told me that if I've ever used a room at home as an office that I have to pay capital gains on that portion of the house sale, is this true? Question Number Three - I sold my business of 42 yrs, not incorporated, and want to know if I will have to pay capital gains there. I received 100 thousand down and am owed 85. Thanks, xxxxxxx

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david ingram replies:

1. If the house is empty, it will be tax free if it is the only oneyou own. If it is rented, you can make an election to keep it as you rprincipal tax free residence for up to 5 years by stating

"I hereby elect to declare the home at 1234 xxxxx street, anywhere, XXto be my principal residence even though I do not ordinarily inhabitit. If you are just on vacation or trying out another place, theelection is good for 4+1 years. If you were transferred by yourcompany to another city, the election is good for as long as you stayin the transferred employment,

2. Using a room absolutely makes that portion of a house taxable inthe USA. As a consequence, I rarely claim an office in the home on UStax returns. However, in the Fedel Saccomanno case in Canada, it isclear that even renting out two thirds as in a triplex does NOT make ittaxable. see *** below..

3. If the business was incorporated, you can claim up to $500,000 ofprofit tax free,. If the business was a proprietorship, the sale issubject to capital gains tax,

If it was a proprietorship and you are kicking yourself for not beingincorporated, do not get too excited. i almost NEVER let a client buythe business as a corporation because the purchaser gets a lousy taxbreak on the purchase. When selling a corporation the purchase priceis usually dropped about as much as the tax saved by the seller so thatthe purchaser stays even.

In my experience, about the only time a Canadian does get to sell theirCanadian corporation for the tax free capital gain, is when it is a oneor two person software company selling out to a public company whowants control of the asset to raise money on the stock exchange. Andthen, it is likely a $4,000,000 sale with $500,000 or it being tax freeand insignificant in the whole picture.

In 1986, Fedel Saccomanno won the sale of his home as a tax free capitalgain as his principal residence. He had bought a triplex with two unitsrented out, and lived in the third unit with his wife on weekends whenhe was not teaching at the University of Waterloo. When he did not gettenure at Waterloo, and sold the property, DNR tried to tax two-thirdsof the profits. Judge Taylor ruled that the entire triplex was taxfree, giving credence to my claim in my Investment Guide. In theInvestment Guide, I suggest that people with duplexes and triplexesshould claim the whole building tax free in spite of the fact thatBulletins IT 120R2 and R3 stated that half a duplex and two thirds of atriplex would be taxable.

>>
>> QUESTION:
>>
>> Hi,
>>
>> Last year, we rented out our condo in Vancouver. The
>> plan then was to have the rent cover our mortgage
>> payments for the 12 months that we would be away. A
>> short term solution.
>>
>> Now, we are planning to be away from BC for a longer
>> period of time (approx. 2 years) and wish to sell the condo
>> in the middle of the year, as we are unable to rent the
>> condo for any longer due to strata council by laws.
>>
>> 1) If we sell the condo when there has been a tenant living
>> in it for 12 months, will we pay capital gains?
>>
>> 2) What are our best options to avoid paying this tax?
>>
>> 3) If capital gains would be owed, for how long would we
>> have to make the unit our principal residence again before
>> we can sell it and not pay CGT?
>>
>> Thank you,
_________________________________________________________________

david ingram replies:

If you filed a section 45(2) election with your first year's rental,you
can rent the condo out for up to 4 years (plus 1 in the calculation)
without incurring capital gains tax if you have not bought another
residence that you are living in.
See Below:

My question is: Canadian-specific

QUESTION: Dear Mr. Ingram,
I bought a house in the December of year 2000, lived there till the endof December 2000 (3 weeks) and started to rent it out on January 1,2001. I filed the election 45(2) to claim the house as my primaryresidence for years 2001, 2002, 2003 and will do it for 2004.
I do not claim a depreciation for those years.
I want to sell the house now. Do I need to move in house first in orderto avoid the payment of the capital gain taxes. For how long I have tostay there to be eligible for not paying the capital gain taxes on soldhouse if I need to move in.

Thank you in advance for you help,
----------------------------------------------------------
david ingram replies:

First I am going torepeat your old question from last July and my answer.

My question is: Canadian-specific

QUESTION: Hi, David!
I would like to know is it possible to use the election under thesection 45(2) again if the old house is sold and the new one is bought.Can it be used unlimited number of times by the condition that it isused for each house only once.

Thank you
---------------------------------------------------------------------------
David Ingram replies:

Section 45(2) isintended to allow people to try something out. This means that if youmove to a rented condo for a couple of years and rent your house out,you can move back into the house without suffering a capital gains taxunder section 45(2).

Since it was passed onJune 17, 1972, (32 years ago now) I have never seen it used more thantwice by one person.

Does not mean it hasnot been used more than twice in thirty years, it just means it isunlikely.

There is no numericrestriction but if you are moving in and out of houses, the CRA willtreat you as a trader and tax you at full rates.

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Now, to answer thisquestion. Section 45(2) is NOT something you can plan to use. Inother words, your living in the house for three weeks and renting itout and filing a section 45(2) election does NOT make it tax free ifyou bought the house to rent and not to live in as your personalprincipal residence.

Your question indicatesto me that you are trying to beat the system and did not buy the firsthouse to live in and unless you can show the tax office that you movedevery stick of furniture in and really intended to live there, the CRAwill not allow it to be sold tax free.

This year, a new policyof the CRA is that they wish form T2091 to be filed with every taxreturn where a personal house was sold during the year.

If it was yourresidence and you genuinely intended to live there and were transferredof suddenly got married or could not stand your neighbour or lost yourdriver's licence or suffered some other disaster that caused you to"HAVE TO" move suddenly, filing section 45(2) will make it tax freeprovided you did not also own another house that you did live in. Ifyou did own another house that you actually lived in, claiming thehouse you have filed the 45(2) election for as tax free, will MAKE THEHOUSE YOU ACTUALLY LIVED IN TAXABLE.

If you have a genuine45(2) election, you do not need to move back in. If it is not agenuine 45(2), moving back in will TRIGGER a tax bill as you move in.

You need a consultationwith someone who knows the rules before you make a mistake. I amavailable in person or by phone at a fee of $350.00 minimum for an hourbut not until November now.

As many know, I chargethis for US / Canada tax an immigration advice as well. I am not alonethough.

If you have a tough USimmigration question to ask or one that I cannot deal with (remember Ido Immigration AND tax) Joe grasmick is the place to g for a telephoneconsultation. His fee is $295.00 per HALF hour and you can get hold ofhim at http://s1.amazon.com/exec/varzea/ts/exchange-glance/Y01Y4838730Y0462867/104-8053170-6203936

I have sent two out oftown people to him in the last month where it was obvious to me thatthe people needed a lawyer as opposed to a consultant..

If you want a freeanswer for a couple of minutes, remember

Answers to this andother similar questions can be obtained free on Air every Sundaymorning.

Every Sunday at 9:00 AMon 600AM in Vancouver, Fred Snyder of Dundee Wealth Management and Iwill be hosting an INFOMERCIAL but LIVE talk show called "ITS YOURMONEY"

Those outside of theLower Mainland will be able to listen on the Internet at

www.600AM.com

Local phone calls to(604) 280-0600 - Long distance calls to 1-866-778-0600.

Old shows are archivedat the site.

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