Paying capital gains tax on a loss

Q: My question today relates to the new changes to capital gains on real estate. My wife and I owned a condo for a number of years. We paid $80,000 in 2006 and sold for $140,000 in March 2016. The problem is we rented the unit out after we bought our house in 2011.  Looking at the new formula for capital gains on real estate,  (# of years home is principal residence + 1)  x capital gain / # of years home is owned, it seems like we’re going to take a huge capital gain hit even though all the capital gain happened in the years before 2011.  In fact, I suspect the property has dropped in value since then.  Are we going to be stuck claiming this capital gain or is there something I’m missing?

– Stefan

A: Stefan, you are deemed to have disposed of your principal residence in 2011 when you started renting it out. The gain up to that point is totally exempt because it was your principal residence for all years that you owned it. This means that you can report the gain (or loss) from 2011 to 2016 as a capital gain (or loss) on your 2016 return.  You’ll need an appraisal of the value at the time of conversion to determine your capital gain.

Alternatively, you retroactively elect no change in use, so long as you have not claimed capital cost allowance to reduce your rental income.  If CRA accepts your late election, you have a $60,000 capital gain on the property and from what you are describing, it was your principal residence from 2006 to 2011 – five years plus 1 for a total of 6 in the formula.   (However, if no principal residence claim was already made for 2006, the number could be 6 plus 1).

The capital gain of $60,000 is multiplied by this number and then divided by a ten-year ownership period (assuming you’ve already declared a different property as your principal residence for 2006). That means that $36,000 out of the $60,000 gain is exempt. The taxable portion of the gain ($24,000) is added to Schedule 3 of your tax return and half of that amount ($12,000) will be added to your income as a capital gain.

You may offset that gain with net capital losses from the current or prior years. If there are none and assuming that your income is taxed at top marginal rates in Ontario (approximately 54%) your tax liability would be just under $6,500. If the property was owned equally with your spouse, you each would report half these consequences; potentially saving money if that puts the income of one or both of you into lower tax brackets.

You should get an appraisal done of the value at the time you started renting the property and decide which of these options makes the most economic sense and then file accordingly. If the value of the property went down, the election may not make sense.  But you should have a professional help you with this.

Your tax returns and the taxes owed should be paid before midnight May 1 to avoid late filing penalties and interest costs on any amounts due to CRA.

Evelyn Jacks is president of Knowledge Bureau, which offers e-learning at knowledgebureau.com. Evelyn tweets @evelynjacks and blog at evelynjacks.com

More stories like this: 

• 7 myths to stop believing about the taxman
• Not paying your taxes could bite you at the border
• 10 tax questions answered

About Evelyn Jacks, RWM, MFA, MFA-P, FDFS

Evelyn Jacks is the best-selling tax author of 55 books, an award-winning business leader and the Founder and President of Knowledge Bureau, an online financial education institute.

Linkedin Website