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Tag: Capital Loss

  • Capital gains tax when renting out your former principal residence – MoneySense

    Capital gains tax when renting out your former principal residence – MoneySense

    According to the Canada Revenue Agency (CRA): “To make this election, attach a letter signed by you to your income tax and benefit return of the year in which the change of use occurs. Describe the property and state that you want subsection 45(2) of the Income Tax Act to apply.”

    So, there isn’t a specific form to file to claim this election.

    A taxpayer in Canada may be able to extend the four-year limit indefinitely, but this requires your employer or your spouse’s employer to ask you to relocate. It sounds like you relocated in order to look for work, Hugh, so this extension will not apply.

    Filing an election late

    The 45(2) election is supposed to be filed in the year you move out of the home. The deadline is the tax filing deadline for your tax return that year. This would be April 30 for most taxpayers, and June 15 for those who are self-employed or whose spouse is self-employed.

    The CRA can accept a late-filed subsection 45(2) election, if your situation matches one from a list of extraordinary circumstances.

    There is jurisprudence to support late-filed election. In Irene Gjernes v. Canada Revenue Agency, the CRA was ordered to reconsider a disallowed 45(2) election that was filed late by the taxpayer despite no extraordinary circumstances.

    For the late-filed election, the CRA can levy a penalty of the lower of $8,000 or $100 per month past the due date. If the tax savings are more than the penalty, a late-filed election may be worth the penalty risk.

    Capital gains tax when changing the use of a property

    Since a home that is converted into a rental property is subject to a deemed disposition at the time of conversion, the fair market value at the time the rental began is the adjusted cost base (ACB) for capital gains tax purposes. A subsection 45(2) election could defer this conversion date.

    Jason Heath, CFP

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  • Tax deductible expenses when selling a cottage

    Tax deductible expenses when selling a cottage

    There are a number of expenses that can be claimed to reduce the capital gain on your cottage, Louise. Capital expenses are an example. The Canada Revenue Agency (CRA) defines a capital expense as an expense that:

    • Gives a lasting benefit or advantage;
    • improves the existing property;
    • is a separate asset; or
    • is considerable in relation to the value of the property.

    Capital gain vs capital expense for the costs of owning and selling a cottage

    There’s a distinction between a capital expense—which increases your cost base and reduces your capital gains tax on a property—and a current expense, which is a repair. Repairs are only tax deductible when a property is used for rental or business purposes against the income earned but have no impact on capital gains.

    In your case, Louise, a good example of a capital expense would be your expense to change a shingle roof to a metal one. In particular, it provides a lasting benefit, is an improvement to the existing roof, and is considerable in value.

    The windows and flooring also provide a lasting benefit. The stove is a separate asset, in its own right. So, these three expenses would also generally be capital expenses that would be added to the cost of the property for capital gains tax purposes.

    What is a capital gain?

    A capital gain is the increase in value on any asset or security since the time it was purchased, and it is “realized” when the asset or security is sold. (Similarly, a capital loss is realized when you sell an asset that has decreased in value since the time of purchase.) Capital gains (or losses) can happen on stocks, mutual funds and real estate. 

    Read more about capital gains in the MoneySense Glossary: “What are capital gains?”

    Is replacing a cottage deck a capital expense?

    The replacement of the old deck and stairs may not be a capital expense, Louise. In fact, the CRA gives a specific example on their website of an expense for wooden steps being a current expense. If you were to replace wooden steps with concrete steps, that would be a capital expense. If you were to repair wooden steps, it would not be a capital expense. It would be a current expense or repair as opposed to a renovation or improvement. So, whether the deck and stair expenses are capital or current would be a matter of fact depending on the exact nature of the work.

    Note that the CRA does not give a specific list of capital expenses, but rather, guidelines for determining the nature of the expense.

    Cottages for sale: What happens if you have a capital gain?

    The calculation of your cost base for tax purposes will then be equal to your original purchase price, closing costs on acquisition, and capital expenses over the years. The proceeds, less the selling costs, less your cost base gives you your capital gain. Half of your capital gain is taxable on your tax return in the year of sale, or two thirds if the capital gain in excess of $250,000 in a given year for a taxpayer. A large capital gain in a high income year could give rise to 25% tax or more depending on your province of residence, income sources, and the magnitude of your capital gains for the year.

    Read more about owning a cottage:




    About Jason Heath, CFP

    Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

    Jason Heath, CFP

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  • You have to sell a cemetery plot—will you owe capital gains tax? – MoneySense

    You have to sell a cemetery plot—will you owe capital gains tax? – MoneySense

    Many non-financial assets depreciate in value. Cars, furniture and other such assets tend to be worth less over time, and they are generally not subject to capital gains tax. However, there may be exceptions, such as collector cars, jewellery, artwork or antiques. You may have to report a capital gain on the sale of personal-use property that has increased in value.

    To calculate the capital gain—or loss, as the case may be—there are three rules:

    1. If the adjusted cost base (ACB) is less than $1,000, the ACB is considered to be $1,000.
    2. If the sale proceeds are less than $1,000, the proceeds are considered to be $1,000.
    3. If both are less than $1,000, there is nothing to report.

    Capital gains on personal-use property

    As a result of these three rules, personal-use assets are usually a non-issue for taxes. In rare instances where a taxpayer profits, the numbers need to be into the thousands to matter.

    Interestingly, when someone buys a burial plot, they actually buy the right to bury, or inter, someone in the plot. That is, the buyer becomes an “interment rights holder,” but they do not own the land itself. Despite this, the empty cemetery plot has value for someone else who will inherit it or buy it.

    When the deceased passed away, they were deemed to sell all of their assets, Brian. This includes the cemetery plot. So, capital gains tax would be payable on their death for any appreciation in value.

    If you, as executor, sell the plot shortly thereafter, the value will likely be similar. If there’s a profit between the time of their death and the sale of the plot, this could give rise to a capital gain for the estate.

    Selling a cemetery plot as part of an estate

    It bears mentioning, Brian, the cemetery plot may have some restrictions related to its sale. Keep in mind the land is not owned. The owner holds the right to be buried there. And the cemetery may or may not permit the private sale of interment rights.

    Since the plot has a value, it may also be subject to probate or estate administration tax, just like any other asset passing through the estate of the deceased. You should speak to the cemetery, Brian, about the rules around selling the rights to the plot. And consider the tax and probate implications of the individual’s death and the subsequent sale of their vacant cemetery plot.

    Jason Heath, CFP

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  • How to carry back a capital loss for a tax refund – MoneySense

    How to carry back a capital loss for a tax refund – MoneySense

    It sounds like you are aware that you can carry back capital losses, Ramesh. If you have a net capital loss on your 2023 tax return, you can carry it back up to three years. So, you can ask the Canada Revenue Agency (CRA) to apply that loss to capital gains you had in 2022, 2021 or 2020.

    When should you carry back a capital loss?

    You can apply some or all of the loss to one or more of those years. If you had capital gains in more than one of the past three years, there are three primary considerations.

    1. 2023 is the final year you can carry back losses to 2020. In 2024, the furthest you can carry back a capital loss is 2021.

    2. If you had a high income in one of those three years, you might be better off carrying the loss back to the year with the highest income. That way, you can maximize the resulting tax refund.

    3. If your income and tax rate were relatively low in one or more of the past three years, you might want to defer claiming the loss. Capital losses can be carried forward indefinitely to use against capital gains in a future higher-income tax year.

    You are not restricted, Ramesh, to claiming a capital loss on securities against a capital gain on securities. So, in your case, you could carry back a capital loss on securities to claim against a previous capital gain on a rental property.

    How to carry back a capital loss

    In order to carry back a capital loss, you have to complete Section III – Net capital loss for carryback on Form T1A, Request for Loss Carryback on your tax return. Although it can be printed, filled out and submitted to the CRA, a taxpayer or their accountant would generally submit the form as part of their annual tax filing.

    After your tax return for the current year is assessed, you will later receive a notice of reassessment from the CRA with a tax refund for a previous year, if applicable.

    Jason Heath, CFP

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  • What should Canadian investors do: Sell or hold with preferred share losses? – MoneySense

    What should Canadian investors do: Sell or hold with preferred share losses? – MoneySense

    1. Rate reset preferred shares

    These became popular following the financial crisis in 2008/2009 to entice investors to buy preferred shares despite low interest rates at that time. They generally “reset” every five years with the dividend rate for the next five years based on a premium over the 5-year Government of Canada bond rate at the time. Rate reset preferred shares currently represent 73% of the Canadian preferred share market.

    2. Perpetual preferred shares

    These represent 25% of the Canadian preferred share market. Perpetuals have no reset date. Their dividend rate is set when they are issued, and they continue in perpetuity.

    3. Floating or variable rate preferred shares

    These are like rate resets in that the rate changes, but those changes are more frequent—typically quarterly. The rate is generally based on a premium to the 3-month Government of Canada treasury bill rate. Together, floating/variable rate and convertible preferred shares represent less than 3% of the Canadian preferred share market.

    4. Convertible preferred shares

    A convertible security can be converted into another class of securities of the issuer. For example, a convertible preferred share may be convertible into common shares of the company that issued the shares.

    Preferred shares Indexes for Canadian investors

    The S&P/TSX Preferred Share Index is currently 57% financials, 20% energy and 12% utilities. Communication services, real estate, and consumer staples makes up the remainder of the market. The financials are tilted slightly more towards banks than insurance companies.

    The current distribution yield of the S&P/TSX Preferred Share Index is about 6.1%. This is the dividend income an investor might anticipate over the coming year. The trailing 12-month yield is about 5.9%. These are attractive rates, Mario, but you can earn comparable rates in guaranteed investment certificates (GICs) with no risk or volatility. So, the high yields need to be put into perspective.

    What to do with preferred shares at a loss

    One consideration, Mario, is if you own your preferred shares in a taxable non-registered account, you could sell them to trigger a loss, if you have other investments that you have sold or intend to sell for a capital gain.

    “Tax loss selling” is when you sell an investment for a loss to harvest the tax benefit of that loss. You can claim capital losses against capital gains in the current year. If you have a net capital loss for all investments sold in your taxable accounts in a given year, you can carry that loss back to offset capital gains income you paid tax on in the previous three years. Or you can carry the loss forward to use in the future against capital gains.

    Jason Heath, CFP

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  • The tax implications of buying a second home in Canada – MoneySense

    The tax implications of buying a second home in Canada – MoneySense

    Primary residences vs. secondary properties

    The tax treatment of real estate in Canada depends on its use. The home you live in—your primary residence—is normally exempt from capital gains tax upon sale due to the primary residence exemption.

    This exemption can even be used on vacation properties, so long as it is “ordinarily inhabited.” While the definition of “ordinarily inhabited” is vague, it means at a minimum you spent time living there during a calendar year. And while there’s an exception for years in which you move and own two homes, you can otherwise only declare one property as your primary residence at any given time. Generally speaking, you’ll want to apply the exemption to the property that has increased in value the most.

    Rental properties don’t qualify for this exemption under most circumstances. When they’re sold, if they have increased in value, capital gains taxes will normally apply.

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    Capital gains tax on a second property in Canada

    When selling a property, if you can’t use the primary residence exemption, then capital gains taxes will be levied against the increase in value. But capital gains are relatively tax-efficient, since only half of the gain is taxable—the other half you can stick in your jeans.

    To calculate the capital gain, you need to first calculate the adjusted cost base, or ACB, against which the sale proceeds will be measured. The starting point is the purchase price, and from there certain additions and deductions can be applied. Common additions include expenses incurred to purchase the property, like commissions and legal fees. Capital expenses, like those used to improve or upgrade the property, can also be added.

    Here’s where it gets a little complicated. Because a building is depreciable property which may wear out over time, investors can deduct a percentage of the property’s cost each year—known as “capital cost allowance,” or CCA. It can only be used against the building itself, not the land portion of the property. When the property is eventually disposed of, the undepreciated capital cost, or UCC—that is, the original cost minus the amount of CCA claimed—is recaptured and taxed as income, with additional proceeds being taxed as a capital gain.

    As a simplified example, say you bought a rental property for $1,000,000. Over the years, you deducted $200,000 of CCA. You then sold the property for $1,300,000. Here’s how it would be taxed:

    • Original cost: $1,000,000
    • CCA claimed: $200,000
    • Undepreciated capital cost: $800,000

    When the rental property is sold, that $200,000 CCA is recaptured and taxed as income. And since you sold it for $1,300,000, you have a capital gain of $300,000. Half of this is taxable, so you add $150,000 to your income that year. Between the recapture and the taxable half of the capital gain, you have $350,000 of income to report on your tax return.

    Capital expenses vs. current expenses: What’s the difference?

    In the above example, the cost of improving the property is a capital cost. It extends the useful life of the property or increases its value. Capital expenses can increase the ACB of the property and can be deducted over time via the CCA. Examples include:

    Mark McGrath, CFP, CIM, CLU

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