An elderly client moves out of his condo in 2020 and moves in with his daughter and son-in-law. The move will likely be permeant. He decided to keep his condo and rent it out. The condo is owned jointly by all three of them - the elderly man, his daughter and son-in-law.
I see two options here:
Change of use and deemed disposition at fair market value of the condo in 2020. In which case the capital gain will be offset by the man’s PR Exemption.
45(2) Election whereby there would be no change in use and an additional 4 years of PR claims by my elderly client.
Am I missing an option?
If we go with option 2 and the condo is not sold prior to my elderly client’s death, there would essentially be no deemed disposition as the children have right of survivorship. How would the PR Exemption be reported in this case?
“and the condo is not sold prior to my elderly client’s death, there would essentially be no deemed disposition as the children have right of survivorship”
.
.
Not sure what you are trying to say here, but your sentence appears incorrect/confusing, because of course there will always be a disposition at death, whether or not a “ROS” exists.
So you imply that Daughter and Son in law already have a different PR, so their shares of this property are already “other capital property” for them.
I don’t think your “data-gathering” phase is complete yet, though, as I would guess that a good idea is to get at least get copies of the written agreements as to beneficial property ownership they each have, and the valuations (and dates) the are /they intend (the kids) to report on their tax returns (and the proportionate reporting of rental income).
Such information may influence your approach and recommendations, as presumably your client does not want to necessarily set CRA against his daughter for some accidental reason.
In any event, the elderly client will be reporting a disposition of his ownership at one of the three potential dates.
[For “best use of the PRE” to be accurately determined, you may need to also know the date and the time of his future death, and also future property values… ]
Yes daughter and son-in-law own the home that they are all currently living in now, No valuations or beneficial ownership agreements have been done as of yet.
If we choose to elect under 45(2), are you suggesting the elderly man has beneficial ownership and we should put an agreement to such in place? And if this is the case, who reports the income and expenses of the rental? Would it be all three owners or just my elderly client?
What negative tax consequence could arise to my client’s daughter (who also my client)?
From reading the above posts, my assessment is that these issues should not be “solved” on the intetnet, as numerous things are already apparently behind the scenes that the parties are not dealing with.
Therefore, sorry, i will be withdrawing from this thread.
Your client (and children) should be aware that a designation of the property by the parent may limit a PRE designation for the daughter and son-in-law down the road, too. This should have been a discussion had with all prior to putting the condo in all three names.
Thank you all for your contributions. Please allow me to rephrase the question as I may have been bogged down in the details.
The condo was purchased in 2018 jointly by all three individuals for the older man to live in. He lived there alone from 2018-2020 and then began renting it out during 2020.
Does the man’s PRE cover the entire gain on the property from 2018-2020, or just 1/3 of it as it is jointly owned?
Is the 45(2) election available to the older man? No CCA has ever been taken on the property.
The adult children will not be designating the condo as their PR now or in future as they own their current family home.
I would greatly appreciate any guidance. I have read folio S1-F3-C2 but can’t find details on joint owners who do not live together.
The other thing you need to know before any sort of decision can be made is who actually paid for the condo/operating expenses. If all the money was coming from the kids it might be hard to argue any principal residence exemption for the dad. Also - who gets the rental income and eventually the capital gains on the condo. I am not sure off the top of my head but my understanding of a 45(2) election is for when a person leaves their principal residence due to a job transfer to another city they can extend their principal residence exemption for up to 5 years. I use it all the time for people that leave Canada to work abroad for a couple of years and start to rent their house while they are gone. I don’t think a 45(2) election applies in this case.
Elderly man’s PRE will only cover his portion of gain on the property (i.e. 1/3). This is because his daughter and son-in-law owns this property as capital property and not their principal residence.
I am doubtful if 45(2) is available as this property is not the principal residence for all 3 owners. For 45(2) to apply, the taxpayer has to completely convert his or her principal residence to an income-producing use. However, in this case, change in use is only applicable to only 1 of the 3 owners (elderly man).
… to to add to the confusion, there’s that whole “Legal/Nominal” vs “Beneficial” ownership issue that may influence who the CRA views as owning the condo for income tax purposes. Although, my experience is the CRA generally looks at a past transaction then takes a position depending on what generates the highest amount of income tax.
Questions such as was the condominium actually purchased by 3 people or did 1 of them put in all the money for the purchase? If they did not all contribute somewhat equally towards the purchase why was it registered in joint names? Can 1 of the individuals require the other two owners to convey the property or transfer legal title to him? If the condominium was sold, would it be expected the proceeds would be divided by 3 or would it be presumed that one of the owners (ie dad) would receive the sale proceeds.
The real owner, the person “beneficially entitled” to [the property], can require the
nominal owner to let him use or have possession of the property, or to give him the
income from it, or otherwise to let him have the benefit and enjoyment of it. He
usually can require the nominal owner to convert the property into another form or
to transfer the legal title to some other nominal owner. Above all, he is able, unless
restricted by the terms of a specific trust, to call on the nominal owner to convey the
property to him and to transfer its legal title to him, the real owner. If he does so, he
will then fully acquire the property by achieving full ownership and will cease to be
merely beneficially entitled to it.
Yes @snoplowguy I agree that the issue of ownership can be very complicated whether beneficial or legal title.
After doing some research and considering legal title alone, I think your approach @owais.ahmed makes the most sense. But to your point, there is a full change in use of the property to the elderly man for his portion, not to the other 2 owners. So if 45(2) were to be filed, it would be filed with his tax return only and apply only to his portion of the gain. Where the requirements specify “full vs partial” change in use, I understand that to mean the entire dwelling (where taxpayer has moved out) as opposed to just the basement where taxpayer is living upstairs. Am I wrong?
Now there is also a basement in the condo?
Sounds like there may be even more to this than scared me off the first time.
For your own liability protection, make sure that the clients (all 3) give you signed acknowledgement that they understand and accept that their capital asset and property income reporing that they are doing is by internet deed poll only, and in no way should be regarded as legal advice, and that they accept full and complete responsibility.
Thanks to BC’s money laundering, CRA have become much smarter regarding beneficial ownership matters.
Please give me a little bit more credit as I don’t rely solely on an internet poll to make any of my decisions. With respect, you don’t know what my research process entails and what other professional connections I have.
Nope - no basement in the condo and no I don’t give legal advice.
I understand that there is a full change in the use of property however, I am not sure if 45(2) can be filed just for elderly man. The reason i say is because, per my understanding 45(2) needs to be applicable to all owners rather than only elderly man in this situation.
For my learning, please share outcome after your research is completed. Thx
Whilst legislation might not have spread as fast as the corona virus from BC to more eastern reaches of the country, what became effective on Monday, 30 November 2020 in BC might well become mandatory in your neck of the woods as well at some point soon.
ie, by new Provincial law, Beneficial owners are required to have their details entered in the “registry of information about individuals deemed to have an indirect interest in land”… which is then also accessible to CRA
I find that I am becoming more and more “hard evidenced-based”, especially with regards to real estate… There are so many misconceptions out there, that receiving a verbal narrative from a participant is often a misdirection.
@Versa
Per your original post, yes - you are missing an option. Per ITA 40(2)(b), the taxpayer could simply reduce the taxable gain on the property when it is sold, per the formula. That is, using the “years plus one” rule, he would pay tax on only a portion of the gain when the condo is sold, based on the number of years it was a PR (plus one) compared with the number of years it was owned. Per your option 1 or 2, he would pay tax on the gain from the date of “change in use” to the date of sale.
Hard to determine which option may be better, but you could estimate the future FMV of the condo, do the calculations, and compare…
]