I’ve reviewed a taxpayer’s case involving a property sold in 2024, with considerations under s.45(1).
Facts:
2021–2022: Property rented to family at cost, not FMV (no s.45(1) change).
2023: Used 100% for sole proprietorship and later listed for sale.
2024: Sold.
I initially planned to prorate the gain on the 2024 T1 based on principal residence vs. non-principal residence years, but now believe a deemed disposition occurred in 2023 due to the change in use to business under s.45(1).
Thoughts:
A T2091 should have been filed for 2023, with proceeds based on FMV at the time of change. A s.45(2) election is not ideal, as the taxpayer married in 2022 and the 2023 PRE was applied to the husband’s property (which sold in 2023), which had a higher gain and he was in a higher marginal tax bracket.
Conclusion:
File a late T2091 for 2023 to report the deemed disposition at FMV.
For 2024 T1, calculate capital gain as sale proceeds minus ACB (FMV at 2023 change).
From 2021 to 2022, it was personal use property, then in 2023, he began using it exclusively for his sole proprietorship. What was the sole proprietorship’s business, and how was the land used in that business? Just questioning whether it was personal use property used in his business, passively, or was the property used to earn income within his business.
Is he registered for GST/HST? You should be mindful of the GST/HST deemed disposition when a property changes its use to commercial purposes from personal use or long-term rental, or vice versa.
This one might be tricky. for 2021 and 2022, if expenses were claimed on the rental income, this might be a change in use already. So change in use happened in 2021,
In 2023, property used 100% for business purposes for part of year. During this time, she claimed property-related operating costs (utilities, mortgage interest, etc.) on T2125.
Full business use was possible because taxpayer primarily resided at husband’s home.
Husband’s property sold in 2023 and business-use property referenced above was sold in early 2024.
Later in 2023, taxpayer and spouse jointly purchased a new home. New residence used 10% for business purposes.
This is a good question. The property did not generate any rental income it was used solely in the taxpayer’s sole proprietorship, but the business generated profit. I believe (though this needs to be confirmed) that the property underwent another change of use in late 2023 or early 2024. The taxpayers temporarily moved back into this property after the husband’s home was sold in 2023 and before their new home was ready for occupancy.
Yes, HST registered
2021 rented to family below FMV no expenses claimed on T776.
I don’t know if your client lives in one of those empty home tax zone, last I looked, there was place where if not FMV rent, empty home tax will apply, and 3 times tax as penalty
Did the sole prop own the house? I doubt it. So then, she effectively created a situation where a business (her sole prop) was renting the house from an individual (herself, as the owner).
The rent amount would be a deduction on the T2125 and income on the T776. This is the same as BUOH, where the taxpayer can set the rent equal to the amount of allowable rental expenses. As such, the net rental income would be zero, which is why we generally omit the T776 entirely.
However, as @jeffliu pointed out, you may have to consider other legislation that deems the rent to be FMV, in which case I suggest not omitting the T776.
Be careful what you mean by “cost”. If that included the mortgage payments, the principal portion is not deductible, so there would have been a positive net rental income.
Also be careful who the “family” is, if she wants to claim any portion of those years as part of her PRE. I seem to recall (without looking it up) that it has to be immediate family - that is, someone who would otherwise have lived in the same home as the taxpayer.
The taxpayer may be looking at some kind of penalty here, no matter what. I would analyze which penalty will be greater - the late filed T2091 or any penalties for empty homes in special zones (as mentioned by @jeffliu - I am not aware of what that might be, though I’m quite sure the UHT would not apply, if that’s what he meant).
If you want to avoid the late filed T2091, I’d suggest you research any way the property could be considered “unused” and then also consider whether it would be better to call this property her principal residence until she got married and moved out. Then, as you noted originally, you could simply use the PRE formula.
If you want to avoid other penalties, or if there is no way to avoid a “change-in-use”, then yes - do the late filed T2091. You may still need to consider whether that happened in 2021 or 2023.
No expenses were claimed against rental income for 2021–2022, as the property was occupied by family members who paid rent below fair market value. Accordingly, the 45(1) provision was not triggered in this situation.
In 2023, a change of use to business purposes resulted in a deemed disposition of the property. A 45(2) election should have been filed on the 2023 T1 to deem there was no change in use.
The capital gain would then be calculated as the proceeds minus the fair market value of the property at the time of change of use.
Initially, I anticipated that when filing the 2024 T1, I would simply calculate the capital gain based on the proportion of years the property qualified as a principal residence to the total years owned. CG = Gain × (Years as principal residence / Total years owned).
I’m currently facing a situation where there are two options.
Submitting a late 45(2) election with a VDP:
This approach could potentially resolve the issue without penalties (if lucky).
Reporting the capital gain as follows:
Calculate the gain as previously discussed CG = Gain x (Years a PR/ Total years owned). However, if the file is audited in the future and a deemed disposition is identified, penalties could accumulate to as much as $8,000.
My instinct is to proceed with option 1. However, after consulting two more senior accountants in my network, one was leaning toward option 2 and the other recommended going with option 2.
The 45(2) is useful only if she intends to designate that property as her principal residence beyond the date of the change in use. Based on your earlier post I’m not sure which property she intends to call her principal residence for which years.
I wouldn’t use VDP to late-file a 45(2). Just send the letter (requesting they accept the late filing) to the Minister or the Deputy Minister or the ADM or whoever it’s supposed to go to. There might be a late filing fee, but you’re only going to do this to avoid a much larger tax bill anyway.
I might use VDP to file a T1 ADJ to report a large taxable gain (deemed or realized) or a late-filed T2091 if there would be large penalties that could be avoided (i.e. $5,000+). On the other hand, I can’t remember if VDP is available in such cases - I would look it up.
Bottom line - it all depends on how much work is required and whether the client would rather pay us to do that work, or simply pay the additional tax + penalties + interest, particularly if the penalties might be levied only years in the future.
She doesn’t intend to claim the property as a PR beyond the change in use.
Facts:
Her property owned 2013 - 2024(rented to family 2021 - 2022, used 100% for business 2023, sold 2024)
His property owned 2019 - 2023(2021 she moved in, they married 2022, sold 2023)
Bought property together end of 2023
If I remember correctly from a brief call about a year ago, the husband mentioned that the property may have undergone another change of use either in late 2023 (the same year as the original change of use) or early 2024. I believe he indicated that they temporarily moved back into this property after selling his home in 2023 and before their new home, which they bought together at the end of 2023, was ready for occupancy.
Key dates RE her property:
2022: The property was not claimed as a principal residence because she got married and was living in her husband’s home (his home was their PR).
2023: The property was still not the PR, as the principal residence exemption was applied to her husband’s home, which was sold that year.
2024: The property was still not the PR, since the couple purchased a new home together at the end of 2023, which is their principal residence.
The property was not claimed as a PR from 2022 onward.
Does this mean I can calculate the gain as previously discussed CG = Gain x (Years a PR/ Total years owned)?
I think you are a great accountant, but I don’t think you are in the right position here. That should be the tax payer’s concern. As an accountant, how do you know what’s really behind the scene, how do you determine if the rent was FMV or not? If the taxpayer provided such information, document it and do it as provided. And make sure it’s for tax compliance only, we are not even looking at other legislation.
I agree, but for argument sake, in 2022, if your client said, there is no market value rental, then how can you do the s 45(1)? that’s change in use to rental or business, and say if your client wants you to do that, the next year, change in use from rental to business, that would rescind the first s45(1) even if it’s approved, we are probably looking at couple violations there, according to your client’s statement