45(2)

Tax Topics
1

A client came to me this morning I am worried that I do not have time to fully research this so I am reaching out.
He bought a home in 2004. In 2019 he bought a second home and moved into it. He began renting out the first property to his daughter below FMV. He has claimed income and has not claimed CCA that I am aware of (only property tax and insurance).
We were thinking that he did not need to claim the rental income to his daughter but this may be affected by a late filed 45(2) decisions
He plans to sell to his daughter this year (likely not before June 24).
He has values of the prior home over time and just assumed he would get the PRE.
I feel that he should have filed a 45(2) in 2019 but even if he did, the four years have passed.

So my questions are:

  1. will he be allowed any PRE
  2. Should we be filing a late 45(2) or does it even matter now that the 4 years have passed?
  3. Is there anything we can do (T1ADJ) to help minimize the issue on this situation.
2

45.2 applies if you are moving for work and want to continue the PRE on that property for 4 additional years past current. I would say this is a change of use at the time of rental commencment with any loss denied as it is not FMV rent. the gain loss since change would be report with loss denied, OR you just claim the ratio of years as PRE / Years owned and claim the PRE that way. REad the change of use rules on CRA for property. I am leaning toward the ratio if family is living in it but i would still read the publication before deciding

3

I had understood that the first 4 years are basic and then any extensions must be due to a move for work. Is that incorrect?

4

Of course. PRE definitely covers the years 2004 - 2019, and if he files a (late) 45(2), it could cover gains all the way to 2023.

Depends on the amount of gain on each property from 2019 - 2023. If he wants to shelter the gain on the “new” house, then no - don’t bother filing a 45(2). If he wants to shelter the gain on the “old” house, then yes - try to late-file the 45(2). Make sure he understands he has to report capital gains on one house or the other for those years - he can’t shelter both.

The only thing I can think of is filing a RC-4288 to request that CRA waive the penalties for not filing the T2091 in 2019. But, you’re gonna have to come up with a good story to convince the MNR to waive them.

EDIT:
Just realized you said it was the owner’s daughter living in the house, and she was paying rent. So, then, you mean to file T1-ADJs to remove the rental income from the father’s tax returns 2019-2023? That will definitely get CRA’s attention, and I’m not sure what proof they will ask for. The question will be, “If it wasn’t rented, why did you report rental income for FOUR YEARS???”

5

Yes you are correct. Here is a good article with examples.