As advisors who hold professional designations in accounting, financial planning, law, and investment management, we still get stumped by questions from clients or may at least be hesitant to give answers without first double-checking whether regulations or standards have changed. Most clients know that we have many resources at our finger tips and one of the most valuable is our Financial Advisory Support Team (FAST). This team is on standby to help answer immediate tax, estate, and financial planning questions that may arise throughout the day. This team is staffed by some of our country’s brightest accountants and lawyers who previously worked in private practice. Their responsibilities are to keep abreast of all the latest tax and legal developments in Canada to help advisors service their clients.
From time to time, I would like to highlight interesting questions that I have sought assistance from our FAST team to answer. I call this ongoing blog series: Think FAST!
The Question:
A client asked about whether there would be any tax consequences from moving into a property that she owns and to which her mother currently lives in, but does not pay rent.
The Answer:
When one owns a principal residence and decides to change it to a rental property, they have effectively changed the use of the property. Similarly, when one owns a rental property and decides to turn it to a principal residence, they have also changed the use of the property. If a “change of use” status applies, you will be deemed to have disposed of the property at the Fair Market Value (FMV) and immediately reacquired it at the same FMV. This may trigger capital gains or losses in the year that such a change occurs. Generally, if you change your principal residence into a rental property, any gain can be reduced or eliminated by the principal residence exemption. If the property has not always been a principal residence and there are gains not covered by the exemption, you can file a CRA election to defer the gain until you eventually sell the property. Similarly, if you change a rental property to a principal residence, you may also file an election to defer the gain to a later date. However, if a ‘Capital Cost Allowance’ was previously claimed on the property for any tax year after 1984, this deferral election cannot be made and a recapture of taxes may result.
As for the client, it turns out that there is no immediate capital gains tax on the property as it is considered to be a personal use property with no change in use. There would only be a change in use if the property changed from a personal use property to an income-producing property, or vice versa. For example, if my client decided to start charging rent on the property to her mother then there would be a change in use at that point. However, since the unit was occupied by a rent-free tenant and the plan is to continue not charging rent, then there is no deemed disposition or need to file any tax deferral elections.
The content in this article is for information purposes only and does not constitute tax or legal advice. It is imperative that you obtain professional advice from qualified tax and legal advisors before acting on any of the information in this article. This will ensure that your own circumstances are properly considered and that action is taken based on the most current legislation