The clients purchased a large home in 2016. From then until 2019 they operated it as a Bed & Breakfast, personally occupying less than 50%. They claimed CCA on the building in all years from 2016 through 2019. Converting to 100% principal residence in 2020 and disposed of in that year.
There will be considerable recapture of depreciation, what is the best we can do on the capital gain/PRE?
You should consider who advised the client to take depreciation on the BnB property. Some accountants would outline, at the start, the pros (tax deferral) and cons (no chance for 45(3) election on change of use) and have the client initial their choice, then sign and date the form. If anyone has a form, would you share it?
Keep a copy of this in your file.
I don’t see a lot of latitude in reporting capital gains. If the housing market is rising, is it reasonable to show the date of conversion as early January/20? In the housing market dipped, it may be reasonable to show the change of use close to the time of the dip.
Can you support the value of the property at the time the change of use, with (1) property appraisal (excellent), (2) real estate opinion (fair), or (3) property tax assessment or online value (poor).
Bottom line is that the client will have recapture and capital gains.
Info re elections on change of use, does not seem to apply in this situation.
also note, "How to determine fair market value."
from CRA website:
Changes in use
When there is a change in use of a property you have, you may be considered to have sold all or part of your property even though you did not actually sell it. The following are some sample situations:
Every time you change the use of a property, you are considered to have sold the property at its [fair market value]
(Definitions for capital gains - Canada.ca)
and to have immediately reacquired the property for the same amount. You have to report the resulting capital gain or loss (in certain situations) in the year the change of use occurs.
If the property was your principal residence for any year you owned it before you changed its use, you do not have to pay tax on any gain that relates to those years. You only have to report the gain that relates to the years your home was not your principal residence.
If you were using the property to earn or produce income before you changed its use, see Real estate, depreciable property, and other properties for information on how to report any capital gain or loss.
Thanks, it sounds as though it is as I thought. The previous tax returns were prepared at the office of a local CPA who has a good reputation, so I was a bit taken aback at the depreciation. Client says the consequences were not explained to them.
