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Second Home and principal residence

Homeowner bought home in 2004 - bought a second home in 2016 . First home was kept and he allowed son to live in rent free, never claimed expenses and no rental income. Sold the first home in 2018 . There was no change in use in 2016 so i believe the proper treatment of the sale is to calculate capital gain and apply the principal residence to 13 of the 15 years owned. Is there any reason this would not be a valid option?

2nd case - same scenario but first home was rented , rental statement filed with income and expenses but no CCA and no major renovations expensed. Do the change of use rules apply in this case and is there any scenario in which they wouldnt?

Thanks in advance for all comments

And which of the two historical stories is the Truth, and which of the two historical stories is a Lie?

You should go with the one that is the Truth…

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Hypothetically, in the first case you are correct. In the second case there would be a change of use when he bought the second house and rented the first house.

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Thanks for your useless input joe.justjoe1, It is much appreciated, You’re a champ

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Thank you

I brought up the second point because i feel I have read in the past about filing an election to designate such a property as a principal residence, as long as no cca was claimed and property wasn’t substantially renovated for business purposes?

I don’t claim to be an expert on this and can’t really help but I do look forward to what anyone reasonable has to say to this question.

Generally true.

Updated on 2017-12-14 with Bill C-63

Refer to Income Tax Folio S1-F3-C2, Principal Residence for more details

https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-1-individuals/folio-3-family-unit-issues/income-tax-folio-s1-f3-c2-principal-residence.html

The ordinarily inhabited rule

Designation of a property as a principal residence

More than one residence in a tax year

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If you wanted to present hypothetical situations about some FUTURE tax planning, you should have phrased your post accordingly.

As it is, your post sounds much more like some dishonest client coming to you and saying: “What if I told you this lie about what happened since 2004- can I evade tax this way” or “What if I told you a different lie about what happened since 2004, could I evade tax that way?”
(In which case, enabling tax fraud is not a good recommendation).
.

Joe, do you have an answer for this HYPOTHETICAL question? I think most of us understand that enabling tax fraud is not a good recommendation.

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Don’t want to get into the heated discussion. But I believe what you are referring in #2 as the subsection 45(2) election. I don’t know the detail on your cases but I believe you can explore the option with the 45(2) election if they are suitable on your cases. And as far as I know, CRA do allow back date election for this subsection; as long as its reasonable; read guide for detail. Thanks

Yes - IF a different HYPOTHETICAL question (other then the one above) was posed, I would encourage a reading of ITA Section 45. (S45(1)(a) refers to what you earlier posted.)

[My answer to the actual question as posed, however, remains the same as posted earlier]

As already suggested, 1st case would seem to involve completion of the T2091 in 2018

My understanding of the 2nd case is such that there would have been a deemed disposition triggered by paragraph 45(1)(a) as justjoe mentioned. The T2091 would have been completed on the 2016 T1.
As kingsmen has suggested, it may have been possible to file a subsection 45(2) election to have the change of use deemed not to have occurred. The election would have needed to be filed by the client’s filing deadline for their 2016 T1 return, although it seems kingsmen.asset may have some experience with late filed elections. I don’t have knowledge of late filed 45(2) elections or if there is a late filing penalty. The other thing you need to be careful of, once the 45(2) has been filed, no other property of the client (ie their new home bought in 2016) could be designated as a principal residence for the years that are covered by the 45(2) election.

Kingsmen and Domique, Thanks for the reference, exactly what I was looking for when I posted

As someone who did not participate in the discussion I’d like to provide my interpretation of what I just read:

“W”: here’s two possibilities, which is more workable?
“J”: which one is actually the fact situation?
“W”: go away

Just a suggestion to “W”…if you want to distinguish two situations, particularly in a public forum - and if you want input from people who do this for a living, present it in such a manner that it doesn’t appear that you are trying to make something “fit”.

Your wording, to me, was poor and unclear. Simply distinguishing the two hypotheticals as UNRELATED types of situations would have accomplished that, avoided the unpleasantness and likely have resulted in a more inclusive discussion. I would not - and did not - provide advice or thoughts given the way the question was posited.

Just a suggestion for the future.

It ain’t just us chatting in the kitchen…

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I understood the two options to be hypothetical, and even if they weren’t they would be presented here (in a publicly viewable platform) as hypothetical to not prejudice any review of the preparer’s client’s returns should some enterprising CRA agent choose to read these boards. Really guys, you know that in a public forum it is ALWAYS hypothetical, and that any opinions offered should be considered starting places for the preparer’s own research, and not definitive tax advice.

To answer the hypothetical question:

Scenario ONE: this is a valid option. As the homeowner wasn’t resident the last two years it is not eligible for the PR for those two years… BUT the rule is “if the client lived in the house at any time in the year”, so if they still lived in the house on Jan 1 2016 and moved out on Jan 2 then 2016 could count as a PR year, and the “lived in plus one year” calculation could be for 14/15 years.
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/principal-residence-other-real-estate/what-a-principal-residence/does-a-property-qualify.html

Scenario TWO:
CRA says you have 4 years (which can be extended indefinitely if you have moved because your boss requires you or your spouse to relocate, and you are not related to your boss, and you return to your home at the termination of the employment), so in this case IF rental statements were filed, and no CCA or major renos were done there would not be a change in use, and you could still claim 13 (or 14)/15 years as PR.
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/principal-residence-other-real-estate/changes-use/changing-your-principal-residence-a-rental-business-property.html

BOTH Scenarios:
That said, consider the 13 vs 14 year idea carefully, because if the new house goes up in value substantially you may have wished that you did not count 2016 as a year for the old house, but claimed it for the new house!

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Somebody hid a previous post of mine for an unknown reason:

The Original Post is not worded as a hypothethical description about a hypothetical FUTURE tax planning situation, and was never reworded or clarified into something else, and hence, when challenged, I said:
“If you wanted to present hypothetical situations about some FUTURE tax planning, you should have phrased your post accordingly.”

The post presented as ONE homeowner who had already had a real actual past history of facts, but was now proposing to con the tax preparer into preparing a tax return not on those actual facts, but on some different mutually exclusive invented version of history if it resulted in a “better” tax result. Hence I said:
“As it is, your post sounds much more like some dishonest client coming to you and saying: “What if I told you this lie about what happened since 2004- can I evade tax this way” or “What if I told you a different lie about what happened since 2004, could I evade tax that way?”
(In which case, enabling tax fraud is not a good recommendation).”

Now, maybe it is possible to phrase the above more diplomatically, but doing so would also play down and understate the seriousness of potential mis-reporting of tax.
Tax preparers should be on their guard against potentially becoming a pawn in Taxpayer’s schemes.
Tax planning is one thing, but “Tax planning of history” is quite another.