Re: co-owners vs. partners
Common-law couple purchased a house for renting. Both parties are entered as co-owners on T776. Operating expenses are auto calculated on each return according to % of ownership specified on T776, but T776 Assets etc. are only assigned to only one taxpayer and not the other.
I manually create a T776 asset etc. for the other spouse and enter only established % of ownership of the property value for each spouse. Same for additions & dispositions.
Main reason would be that in case of relationship breakdown, where returns would be separated, each co-owner would have an Assets & CCA history.
Can anybody anticipate problems with this?
Re: co-owners vs. partners
Are you sure that it is a legal “co-ownership” structure?
If I were you, I would first get their lawyer to interpret the purchase and ownership documentation and put it on their letterhead the terms and type of ownership to assist in properly documenting this.
(From your description, it sounds more likely that it is joint ownership of a partnership?)
Taxcycle seems to be treating it correctly as entered, so if it is a co-ownership, that would seem to be correct.
TaxCycle is handling it correctly. In the event of a relationship breakdown, one or the other would end up with the property or it would be sold and split according to the ownership percentage.
Don’t second guess the system or the relationship.
After extensive conversation with CRA’s T776 & related Assets’ senior analyst:
In the case of a simple spousal joint purchase of a property for rental purposes ( both spouses are named on purchase agreement as co-buyers) , each spouse may be identified as co-owner on their respective T776 form according to his/her related % of ownership. A partnership may arise if the rental becomes more extensive and qualifies as a “business” , should more properties purchases, additional services (janitorial, cafeteria etc.) are acquired or provided.
each co-owner’s asset purchase/expense amount (addition/disposition) is entered on his/her respective T776Asset Manager according to % of ownership.
CCA claim and remaining UCC for each co-owner/spouse, is properly auto-calculated according to % of ownership.
Where one co-owner decides to sell/dispose of his/her property ownership, then, his/her T766 will reflect the transaction and associated terminal loss, recapture, capital gains etc. on her/his respective related forms. The remaining spouse/owner will continue ownership ( totally if he/she decides to purchase his/her spouse’s % or partially if the % is sold to another party) .
BTW, a common-law/married relationship breakdown may not necessarily mean a disposal or sale of rental property. Each or both individual may wish to remain co-owners while choosing to terminate their marital status.
I have a few clients that are in this situation and since they are not operating a business and are likely to dispose of it together, you should never claim CCA as disposal will trigger a full recapture. If it is decided at some point to move into the unit, change of use will likely have the same problem. Finally, many homes are bought as tenants in common and later it is decided to rent it out.
I maybe should’ve been a tad bit more specific. The rental property consist of one 60 year old building used for machinery storage which by the time the rental agreement is over will most likely have to be demolished; the rest is a sizable piece of land used as part recreational vehicles parking and storage, part construction garbage storage bins’ storage. It is situated in a rural area and was never used or rented to be used as residence but for now, it is considered “safe” and usable for the purpose.
The land which is basically 80% of the property’s value is not eligible for CCA.
The CCA claim (which consist of the building itself + a few accessories) is based solely on the fact there will be no recapture but most likely a terminal loss at the end of rental agreement.
I would never claim CCA on a rental residence ownership where one would assume will increase in value at least for the 30 years after purchase (assuming it was maintained properly; I’ve seen residences loose over 50% of purchase value because of electric heating system, poor overall maintenance and extensive necessary upgrade to foundations).
In a way it is always a decision based on the owners’ wishes and educated guess.
Unless this senior analyst was a lawyer who had examined the specific purchase agreements and land titles office registration certificate and written agreements between these parties and ascertained the paperwork on the source of purchase funds and the status of their Union in their particular Province, I would not take his word on the status of either the beneficial or legal ownership of this specific property…
Since tax issues follow the legal contract issues, not the other way around, I would not complete the T776 until the client has first produced the documentation required to do so.
Thanks all for your feedback. It is always educational to discuss a particular issue and explore every suggestions and comments.
I will certainly consider everyone of them.