Capital gains tax rules on a house owned with siblings

Q: I’m hoping you might be able to shed some light on my inquiry. My brother and I bought a home in Vancouver 12 years ago which was predominantly rented out during the first seven years. The years after that, with bad tenants, the house was in such poor condition that it was pretty much made uninhabitable. Now my brother demolished the house and lives in the new house with his wife while I’ve been living outside of Canada—in Europe—for the past seven years. My brother and I would eventually like for my name to be removed from the mortgage by buying me out so he can fully own the home himself. My plan is to now move back to Canada in the next few months and the money would be very useful for settling down again in Canada. I haven’t claimed any principal residence claims nor sold any other home and technically I don’t see this as a sale. What are the tax implications?

—Preet

A: Well, this is a little complicated, to say the least.  Have you been a resident of Canada for the past seven years or did you become a non-resident?  If you moved to Europe, severed your ties with Canada and became a resident of another country, you should have filed a final return in which you assigned a fair market value on the date of disposition on your taxable assets and potentially paid departure taxes.

However, real estate is an exception. It is classed as a “Taxable Canadian Property” and the accrued gains/losses are taxable to Canada even though you are a non-resident unless you file an election to report a deemed disposition on Form T2061A.  If you make the election and if you previously lived in the property as you noted, then a portion of any capital gain on the disposition of the property would be tax exempt. Use Form T2091 to make that claim. If you remained a non-resident, any increase in the value of the property (land plus building) will be taxed by Canada when you dispose of it.

When your brother moved into the property, it changed from an income-producing property to personal-use property, unless your brother paid you rent. That transaction must be reported in the year of change by you. If the value of the property decreased, the taxes you may have paid on departure can be recouped as the gain reported seven years ago was larger than the actual increase in value.  You would do that by adjusting your departure return.

For your brother the filings are different. Since your brother has already moved into the home, there is a principal residence component as of the year that he moved in, which will reduce a future capital gain on his return. Normally, when the use of a property changes from income-earning to personal use, the property is deemed disposed of at fair market value at the time of the change in use. However, so long as no depreciation (CCA) was claimed on the rental, he can elect to ignore the change in use until he actually disposes of his portion of the property.

If you remained a resident of Canada: You will have been filing tax returns in Canada and reporting the rental income/loss each year.  Otherwise, the tax consequences are similar to the above.  Clearly, it would help for you to get professional assistance with these filings at every juncture, especially since the reporting rules for principal residences changed in 2016.

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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.

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