Sale of principle residence fell through and sellers retained the $100K deposit

Tax Topics
1

I have a client that had their primary residence up for sale. A development company wanted to purchase the whole block of properties to build a condo complex. They gave them a $100,000 deposit. In expectation that the deal would go though my clients bought an new home in Sudbury. Eventually the deal fell through and the development company had to forfeit their deposit.

So now, the property that was for sale is no longer their principle residence so a change of use will have to be filed and fair market value as at the date of their move will have to be determined. The question is do I need to report the $100K deposit as income or is it to be used as part of the eventual sales price of the house. I’m leaning towards using it as part of the eventual sales price. What do you think?

2

Top of mind, windfall. Nothing was disposed of?
If they’re in a market like Vancouver, FMV may have dropped over the period. Change in use when Sudbury occupied. Tax free gain to that date. Rental or personal use property until sale at capital loss?

3

$100,000 capital Gain on date of forfeiture
(Taxable Capital Gain $50,000.00)

4

Based on what? Just offering an answer without explaining why is not helpful.

5

Consider the facts you stated.

  1. There is no disposition of the property, no sale.
  2. There is no change in use, it remains a personal use property; it is not a rental so ss. 45(1) doesn’t apply, so no deemed disposition
  3. The client resides at a new residence. This is incidental and relates only to the year the individual ceased using the first residence as their primary residence for tax purposes. When it is sold, the ratio of years will factor into the calculation of any gain and its inclusion in income.

As this venture is capital in nature, the $100,000 will be taxed as a capital gain. It is a disposition of a “right” under the purchase and sale agreement. Because the “right” to the contract is separate from the “title” to the property, the Principal Residence Exemption (PRE) cannot be elected to exclude the income from taxation. Further, even though the property was a principal residence, the $100,000 is not considered proceeds from the sale of the house itself. Since the sale never closed, there was no “disposition” of the home.

Report this on Schedule 3 (Capital Gains or Losses):

  • Description: You can list it as “Forfeited deposit on [Property Address].”

  • Proceeds: $100,000.

  • Outlays and Expenses: Your clients can deduct any legal fees or other direct costs they paid specifically to handle the failed transaction or to secure the forfeiture of the deposit. This will reduce the taxable amount.

Note, if the client has any capital losses carried forward or in that year it can be used to offset that gain.

6

@iain.fyffe
You can look it up - - its even been answered in this forum before, with the reference given - back in Feb 2021
This question has already been asked by the same OP back in 2021… And already been correctly answered then…

7

I did look it up, because that’s what you should do when someone needs an answer. This addresses forfeited deposits:

8

@iain.fyffe
As I noted, this OP asked this same question in Feb 2021,and that exact reference was already given in answer to that post in Feb 2021.
(Which in turn flows from the definition “disposition” in subsection 248(1))