Banka: The tax ramifications of capital gains losses and profits
Capital property is defined in Section 54 of the Income Tax Act as any depreciable property and any property (other than depreciable property), any gain or loss from the disposition of which would, if the property were sold, be a capital gain or a capital loss.
Some examples of capital property are cottages, securities such as stocks and bonds and land, buildings and equipment used in a business or rental operation.
A capital gain is when you sell or are considered to have sold a capital property for more than the total of its adjusted cost base and the outlays and expenses incurred to sell the property.
Adjusted cost base is defined as the original cost of the property plus any expenses incurred to acquire it such as commission and legal fees.
A house may be purchased as a principal residence and then later rented out, which would be considered a change in use because the purpose of the property is changing from personal use to income producing use.
When you have a property for personal use, you are unable to write off any related expenses or deduct any capital cost allowance on the property.
But you are able to do that if you have an income producing property, or if the use of the property has changed.
Now if you change the use of the property, the Canada Revenue Agency deems that you have disposed of the property on the date that it started to be used for income producing purposes.
So if you had a home that you were going to rent out, the value of the home at the time of change in use would be the lesser of the fair market value and the actual cost of the property plus any capital gains recognized.
Any loss could not be claimed because the home was a principal residence.
However, there are special rules when this property is or was a principal residence in that you can defer any capital gain provided that no capital cost allowance was claimed on the property if you file an election by way of a letter attached to your income tax return.
This election will continue to be in effect until rescinded by you.
You would still need to report any income and expenses received from the rental of the property, but you would not be able to claim any capital cost allowance on the property.
One thing to keep in mind is that we are only allowed one principal residence per year and we cannot designate a different principal residence each year without CRA questioning whether we are in the business of buying and selling property.
But if you keep a rental property designated as a principal residence, then any gains you make on the eventual sale of the property would be tax free.
None of the change of use rules apply if you rent out a portion of your house and you remain living in the other portion.
The change of use rules will not apply as long as the income is secondary to the main use as a principal residence and there is no structural change and no capital cost allowance has been claimed.
If you become a non-resident then the change in use rules apply and there is no principal residence exemption for non-residents.
Many small business owners use their automobiles for both personal and business use.
These persons need to keep track of their total mileage and the portion of the mileage that is personal versus the business use portion.
One other method could be to work out a percentage of use based on the days used.
For example, an automobile that was used five days for work and two days for personal use during a week and taking into account holidays, vacation, illness; a rough estimate may be that the automobile is used 65 per cent for business.
The automobile expenses for the business portion can be deducted against business income.
Also, only a portion of the capital cost allowance or lease payments can be deducted based on the ratio of business mileage over total mileage or a business use percentage.