My client left Canada in 2021 (cut all ties and took his family overseas indefinitely). Him and his wife retained their principal residence here in Canada and began renting it about a week before they left. I was considering the 45(2) election to avoid the change in use due the rental but they can’t take the PRE for the years that they are non-resident anyway. Would it make more sense to claim the deemed disposition of the property and “bump up” the cost base so when they ultimately sell it, the higher value is now the cost base?
How do I handle that week before they left that they started renting?
Interested in hearing your opinions. This is my first (and hopefully last) non-resident client!
Thanks!
I think this is a very tricky situation, the section 45(2), if you use it, basically nullified your client’s non-resident status because the intent to leave is not permanent.
@obhorst that clause is for extending the use as a principal residence for the additional 4 years which the 45(2) allows for. As my client is not a resident, he will not be eligible that PRE extension of 4 additional years. But he is eligible to file the election and avoid the change in use. My question is - is it worth it to do so and if I don’t file the election, how do I handle that one week gap because there is also a deemed disposition on leaving the country!
This makes sense @SmallBizGuy. There should not be a gain or loss reported for that one intervening week as it’s too short of a time period.
Is the deemed sale reported in the exact same way as the actual sale? So answering “yes” to the question on the first page “did you sell your home in 2021” ? I keep looking for a box to tick that indicates it was a “deemed” sale vs an actual sale.
I’d probably file the first disposition (deemed, on change of use) on the T2091 with appropriate details and the second (deemed, on emigration) on the S3 with both values the same. It may be “wise” to get a proper appraisal done, though most people are cheap, and get a realtor to write a letter of opinion (more of less worthless).
It doesn’t matter if it’s a deemed disposition or not - and the minorly non-technical language is likely TC’s. Both dispositions remain reportable, even if the second one is really moot.
The actual form says: “Even if you do not sell your property you may have a deemed disposition that you must report. A deemed disposition occurs when…”
I am actually curious if there is going to be transfer tax on the deemed disposition and acquisition.
The acquisition will deemed to be made by your client after he/she becomes a non-resident, and non-resident buying Canadian property, I think is subject to a higher transfer tax in some jurisdiction
It is not an actual transfer of ownership from one person/entity to another. It is a deemed disposition to avoid accounting complications for the income taxes purposes when status changes.
There are exclusions for departure tax deemed disposition and Canadian real property are excluded from the deemed disposition so you do not need to worry about that 7 days portion. Also, if your client were tax resident for less than 60 months then all the assets purchased before they became tax resident of Canada are excluded from the deemed disposition.
Deemed dispositions
If you ceased to be a resident of Canada in the year, you were deemed to have disposed of certain types of property at their fair market value (FMV) when you left Canada and to have immediately reacquired them for the same amount. This is called a deemed disposition.
This applies to most properties. Some exceptions are:
Canadian real or immovable property, Canadian resource property, and timber resource property
Canadian business property (including inventory) if business is carried on through a permanent establishment in Canada
pension plans, annuities, registered retirement savings plans, pooled registered pension plans, registered retirement income funds, registered education savings plans, registered disability savings plans, tax-free savings accounts, deferred profit-sharing plans, employee profit-sharing plans, employee benefit plans, salary deferral arrangements, retirement compensation arrangements, employee life and health trusts, rights or interests in certain other trusts, employee security options subject to Canadian tax, interests in certain personal trusts resident in Canada, and interests in life insurance policies in Canada (other than segregated fund policies) (for a complete list, refer to the definition of “excluded right or interest” in subsection 128.1(10) of the Income Tax Act)
property you owned when you last became a resident of Canada (or property you inherited afterward) if you were an individual who was a resident of Canada for 60 months or less during the 10-year period before you emigrated and you are not a trust
In your client’s case since he cannot use PRE 4 years excemption on 45(2), and also if the value of the house has appreciated in that case not sure what added advantage do you get to cancel the change of use. In fact, I think if your client is moving to the US then it’s possible (I am not sure though) that if you allow the change of use deemed disposition to take place the cost basis will be set to higher value. Anyways, he will not have to pay any taxes as I suppose that all the years so far he has been using it as his primary residence?
A non-resident who had primary residence (since his/her spouse/dependents was/were staying there) can elect section 45(2) to cancel change of use when he/she changes the use of the entire property to rent at arms length even though he/she is not allowed to claim the 4 year PRE exemption since they are non-residents.
2.76 In spite of the limitation mentioned in ¶2.75 in connection with the principal residence exemption, an election under subsection 45(2) or (3) could allow a non-resident owning a property in Canada to defer a taxable capital gain which would otherwise result from a deemed disposition of a property on a change in its use (see ¶2.48 to 2.49 and ¶2.54 to 2.55).