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LPP - Capital gain

#1

Doing some tax planning that involves the sale of a high value LPP. I have the Vday Value and the expected proceeds. Can the ongoing mtce costs and insurance paid to keep this property from 1972 to now be included in the outlays and expenses related to selling the property?

#2

Those would LIKELY be Carrying Costs which you would add to the ACB,

#3

My thinking is that the answer is “no”. You can’t add these costs to the ACB. These are also not “outlays” connected with the sale or purchase of the asset, such as real estate commissions on the sale of a property. Subsection 53(1) of the Act outlines adjustments that can be added to the cost base. I don’t see anything in that subsection that would allow maintenance and insurance to be added to the ACB.

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#4

Those costs have been expensed year after year and would not be part of the ACB.

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#5

Unless the property is being used to earn income, the expenses likely wouldn’t be deductible. The designation of the property as LPP would suggest it’s not an income property but that’s not stated.

#6

Hello all

The property in question is an 18th century violin, It has not been used to earn income in the past. It is lent out a few times a year to Canada Council of Arts. The owners however do incur a cost to maintain and insure this item. Although these expenses are not a direct selling outlay, My thought was that without these costs (the maintenance anyway) this item would not have appreciated to the degree it has.

#7

We tried answering your question without proper information. This is a reminder to always ask more questions before answering. Our first answer always needs to be “It depends.” We make unfounded assumptions based on our own experiences which are not necessarily relevant.

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#8

Curious and interesting topic.

You would need to search prior court cases and CRA internal and external rulings to obtain a better answer. Logic does not always prevail. However there should be a fair number of precedents for rare and valuable antiquities and art. You will need to dig more deeply. Nothing that can be found quickly totally applies to your situation.

Here are a few quickly Googled references.

CRA
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-127-capital-gains/completing-schedule-3/listed-personal-property.html

Because LPP is a type of personal use property, the capital gain or loss on the sale of the LPP item is calculated the same way as for personal use property. For more information about these rules, see Personal use property.

To determine if you have a LPP loss and for information on applying these losses to previous or future years, see Listed personal property (LPP) losses.

Some tips and traps

https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-127-capital-gains/completing-schedule-3/personal-use-property.html

https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-127-capital-gains/capital-losses-deductions/listed-personal-property-losses.html

Other

https://taxinterpretations.com/
https://taxinterpretations.com/site-search/all/Listed%20Personal%20Property
https://taxinterpretations.com/cra/severed-letters/2017-0698561m4
https://taxinterpretations.com/site-search/all/Listed%20Personal%20Property?f[0]=im_field_facet_category%3A245026
https://taxinterpretations.com/site-search/all/Listed%20Personal%20Property?f[0]=im_field_facet_category%3A245035

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#9

Was this violin used and played? If so, how would that affect the LPP status.

Who owns the violin now? Is the current owner considering to sell or donate it? Is the current owner estate planning. If left to estate upon death, how does this affect LPP status?

How are maintenance and repair costs considered?
How are insurance costs considered?
How would legal tax advice costs be consider? Schedule 4 or ACB outlays?

Depending on the valuation and amounts under consideration you may wish to have a Tax Lawyer undertake a survey or related matters and render an opinion. You hold that opinion at the ready and use only if required. At least it could give you and your client peace of mind.

#10

I agree that it’s a stretch to say the insurance contributed to the value of the violin. For the repairs, the answer would include determining whether the expense provides a lasting benefit (it may if you argue that without the maintenance, the usability of the violin would decrease significantly, but that may also be a stretch argument). CRA’s view on capital v repairs also looks at whether the expense maintains or improves the property. They say that restoring the property to its original condition is usually a current expense.

Agreed that it’s an interesting situation. I would also suggest a review of case law to see if there’s something close to this situation. However, the library of case law on capital v expense is voluminous.

#11

The insurance is not an ACB cost - it is money expended to protect the owner and does nothing to increase or maintain the value of the violin.

The maintenance expenses also do not increase the value of the violin. The simply attempt to retain the value. Restoration expenses would be added to ACB, but not routine maintenance.

Think of it this way: If all maintenance could be added to ACB, how would we ever come up with a value for a house sale? We’d have to have receipts for every bottle of cleaner, mop, soap, etc. Not reasonable!