tax treatment re capital gain

colleenkolowicz · ‎July 31, 2022

I have a client who sold a property which housed a principal residence (75% of the property), a rental property (20% of the property) and an old T2125 business which was no longer active as the property had never been sold. I calculated the proceeds for the home, rental and business. Regarding the rental and business, I still had a substantial UCC balance as CCA was not fully taken over the previous years. I allocated the proceeds to the UCC first and then took a large terminal loss on the tax return. The balance of the dollars on the sale went to create the capital gain. Fortunately there was no tax to pay which was a relieve as this tax return is being filed late. CRA will get their money in future years as a mortgage was taken back on the sale, thus future interest income. Does anyone see an issue with what I have done assuming I have used proper numbers. The bulk of the gain was for the principal residence which is tax free. Any feedback would be appreciated. Thank you.

dlarryhancock · ‎August 10, 2022

Um. you really need to talk (in person or on phone) to someone who knows the tax rules and make certain that they understand EVERYTHING about the past returns filed and the situation at the time of disposition. You have raised too many questions in your posting.

In brief, two things stand out... 1) If a building was acquired for the main purpose of it being a principal residence, the use of part of the property for a business or the rental of a portion of the property would be considered ancilliary use and the profit on the sale of the entire building could potentially qualify for the principal residence exemption...

EXCEPT.....

2) If Captial Cost allowance has been claimed on any part of the building during the entire time it was owned, this invalidates a principal residence claim on the disposition of the property. The full capital gain is subject to tax.

DO NOT TAKE MY WORD FOR THIS (I might be wrong).

Seek advice from someone with proper training and provide them with full information.

But also keep in mind, that planning for minimization of taxes on the eventual disposition of a property should begin at the time the property is acquired and every time there is a contemplated change of use for the property in full, or for any part of the property!

Larry Hancock CPA

colleenkolowicz · ‎August 10, 2022

Thanks for your input. Unfortunately, the client ended up owing some dollars as I phoned CRA and they advised that the proceeds get netted against the gain and only 50% of the UCC is taken into the capital gain calculation. I never have heard of this ancilliary use rule. The rental was a 5 unit building so I suspect CRA would challenge, but I will look and see if I can find information. If you have some written material I would appreciate reading it, but it might be a little late for this filing. I did not start this file from the beginning, it started many years before I worked on the file. Thanks for your help