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Geyser
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Basement suite tax bomb explodes

Mon Oct 03, 2016 3:39 pm

I told you that the CRA wouldn't be able to resist grabbing some of the massive price gains in real estate, but several posters insisted that the Primary Residence Exemption would remain sacred. 

Well guess what?

Here's the bombshell, as reported on The Greater Fool blog:

[size=100]Here are the facts:
[/size]
  • Taxpayers must report the sale of the family home if you’re claiming an exemption from capital gains tax (in the past that exemption was automatic). ‘Basic information’ about the property will be required on the tax form – yet to be determined. If you don’t comply, no exemption.
  • The CRA will have authority at assess you for capital gains tax on real estate that is not reported on the tax return for the year in which it is sold.
  • Ottawa will work with provincial governments (which maintain land registry operations) to ensure that all residential real estate transactions are recorded and taxed as required.
  • The tax return, starting next April, will require details on the date a property was acquired, the proceeds of disposition and a description of the property. To qualify for a capital gains tax exemption, you must complete and file a separate Schedule. The full exemption may not be granted, depending on the details provided.
  • If you sell your home but forget to include this information on your return, the CRA will not allow the proceeds to be tax-free. In that case you must ask the CRA to amend the return. This amendment will be granted “in certain circumstances” but may also come with a penalty equal to the lesser of $8,000 or $100 per month from the sale date to the request date.
  • If you have a suite in your home, then sell it, the selling price must be split and reported. Part of it will qualify to the tax exemption and part will not. In markets with elephantine gains in home prices, this could be quite the bombshell.


So, if part of your home is occupied by a basement suite you can expect any capital gain on that percentage of the homes square footage to be taxed. I'm guessing that the CRA will have questions about the rental income too. Ouch!

Sounds fair to me. 
 
VanLord
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Re: Basement suite tax bomb explodes

Mon Oct 03, 2016 3:53 pm

Garth doesn't sound to happy about this, I guess he might have some tax liabilities, that he wasn't planning for.
 
Geyser
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Re: Basement suite tax bomb explodes

Mon Oct 03, 2016 4:04 pm

VanLord wrote:
Garth doesn't sound to happy about this, I guess he might have some tax liabilities, that he wasn't planning for.

I agree. It appears to be a potentially massive tax grab from a lot of small tax cheaters disguised as action against a few big overseas cheaters.
Having said that, I fail to see why somebody who has a self-contained rental suite in their basement should be treated any differently than their next door neighbour who only has a single similar rental suite in a condo building across the street.
 
VanLord
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Posts: 288
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Re: Basement suite tax bomb explodes

Mon Oct 03, 2016 4:18 pm

Geyser wrote:
VanLord wrote:
Garth doesn't sound to happy about this, I guess he might have some tax liabilities, that he wasn't planning for.

I agree. It appears to be a potentially massive tax grab from a lot of small tax cheaters disguised as action against a few big overseas cheaters.
Having said that, I fail to see why somebody who has a self-contained rental suite in their basement should be treated any differently than their next door neighbour who only has a single similar rental suite in a condo building across the street.

Well I'm not going to debate your views on this, but interesting that none of the newspaper articles I read mention anything about the changes regarding suites.  On the flip side this actually discourages rental of a suite, which will end up making the situation worse, in terms of affordable housing.  I can think of a few people who have suites, that may want to stop renting them.   Why collect a lousy 800 bucks a month and end up with a potentially huge Capital Gain.  Also definitely a bombshell if it retroactively changing the practice that we have talked so much about.
 
reallyreal2
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Posts: 666
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Re: Basement suite tax bomb explodes

Mon Oct 03, 2016 4:31 pm

VanLord wrote:
Geyser wrote:
VanLord wrote:
Garth doesn't sound to happy about this, I guess he might have some tax liabilities, that he wasn't planning for.

I agree. It appears to be a potentially massive tax grab from a lot of small tax cheaters disguised as action against a few big overseas cheaters.
Having said that, I fail to see why somebody who has a self-contained rental suite in their basement should be treated any differently than their next door neighbour who only has a single similar rental suite in a condo building across the street.

Well I'm not going to debate your views on this, but interesting that none of the newspaper articles I read mention anything about the changes regarding suites.  On the flip side this actually discourages rental of a suite, which will end up making the situation worse, in terms of affordable housing.  I can think of a few people who have suites, that may want to stop renting them.   Why collect a lousy 800 bucks a month and end up with a potentially huge Capital Gain.  Also definitely a bombshell if it retroactively changing the practice that we have talked so much about.

http://www.moneysense.ca/spend/real-estate/mortgages/no-more-discounts-for-fixed-rate-mortgage-borrowers/
More and more great news for the RE industry.
 
VanLord
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Posts: 288
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Re: Basement suite tax bomb explodes

Mon Oct 03, 2016 5:39 pm

reallyreal2 wrote:
VanLord wrote:
Geyser wrote:
I agree. It appears to be a potentially massive tax grab from a lot of small tax cheaters disguised as action against a few big overseas cheaters.
Having said that, I fail to see why somebody who has a self-contained rental suite in their basement should be treated any differently than their next door neighbour who only has a single similar rental suite in a condo building across the street.

Well I'm not going to debate your views on this, but interesting that none of the newspaper articles I read mention anything about the changes regarding suites.  On the flip side this actually discourages rental of a suite, which will end up making the situation worse, in terms of affordable housing.  I can think of a few people who have suites, that may want to stop renting them.   Why collect a lousy 800 bucks a month and end up with a potentially huge Capital Gain.  Also definitely a bombshell if it retroactively changing the practice that we have talked so much about.

http://www.moneysense.ca/spend/real-estate/mortgages/no-more-discounts-for-fixed-rate-mortgage-borrowers/
More and more great news for the RE industry.

the stress test only applies to CMHC backed mortgages
 
reallyreal2
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Posts: 666
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Re: Basement suite tax bomb explodes

Mon Oct 03, 2016 6:02 pm

VanLord wrote:
reallyreal2 wrote:
VanLord wrote:
Well I'm not going to debate your views on this, but interesting that none of the newspaper articles I read mention anything about the changes regarding suites.  On the flip side this actually discourages rental of a suite, which will end up making the situation worse, in terms of affordable housing.  I can think of a few people who have suites, that may want to stop renting them.   Why collect a lousy 800 bucks a month and end up with a potentially huge Capital Gain.  Also definitely a bombshell if it retroactively changing the practice that we have talked so much about.

http://www.moneysense.ca/spend/real-estate/mortgages/no-more-discounts-for-fixed-rate-mortgage-borrowers/
More and more great news for the RE industry.

the stress test only applies to CMHC backed mortgages


True - but seems like its one thing after another today.
 
VanLord
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Posts: 288
Joined: Fri Aug 24, 2007 3:52 pm

Re: Basement suite tax bomb explodes

Mon Oct 03, 2016 9:25 pm

reallyreal2 wrote:
VanLord wrote:
reallyreal2 wrote:
http://www.moneysense.ca/spend/real-estate/mortgages/no-more-discounts-for-fixed-rate-mortgage-borrowers/
More and more great news for the RE industry.

the stress test only applies to CMHC backed mortgages


True - but seems like its one thing after another today.

True and a Carbon Tax, my guess is Justin has been spending like a drunken sailor and is now starting realize he's in a giant deficit, so these are all stealth moves to raise taxes.  From a real estate perspective they are all saying this is to avoid a big crash, but its like 5 years to late and this could very well be yet another nudge over the cliff.  If so, I hope the Libs take the blame for the crash
 
VanLord
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Re: Basement suite tax bomb explodes

Tue Oct 04, 2016 10:23 am

From what I can tell nothing has actually changed when it comes to secondary suites.  Below is the CRA information that greaterfool linked to.  Noting that the 2016 version of T4037 doesn't exist yet, so the CRA is still working on that, but I bet the three criteria that CRA currently uses to consider if the secondary suite is taxable or not,  will still apply.  Note the wording in question 8. "you MAY have to split the selling price and the adjusted cost base"...  I think What they have done is provided a much better mechanism to track the sale of property.  Which will allow them to go back and question these criteria (perhaps).  I think this is a prudent move though and as we have all discussed, catching the obvious cheater and hopefully this helps crack down on those cheaters, so I think its a great move to force this to be tracked.  Garth's worry about the government knowing your personal finances...let's face it they can know if they want to...Lets hope this actually works, I'm a bit skeptical that overseas buyers will actually be stopped, but that's likely where the extradition treaty with China comes in...This would then give them the ability to get those tax cheats who hide in China, while also allowing us to send back the criminals that escape to Canada.  Overall I think they are taking the right steps and it seems that all levels of government are starting to act.  However big brother-ish this all maybe, they are starting to take steps and will hopefully catch more of the cheats. 

http://www.cra-arc.gc.ca/gncy/bdgt/2016/qa11-eng.html

8. What do I report when I actually sell my principal residence, if I used part of it as my principal residence and another part for my business or to earn rental income?

If only a part of your home qualifies as your principal residence and you used the other part to earn or produce income, you may have to split the selling price and the adjusted cost base between the part you used for your principal residence and the part you used for other purposes (for example, rental or business). You can do this by using square metres or the number of rooms, as long as the split is reasonable.

Instructions will be provided in the guide T4037, Capital Gains 2016, on how to report the sale of your principal residence in this situation.
 
reallyreal2
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Posts: 666
Joined: Fri Jun 03, 2016 11:30 am

Re: Basement suite tax bomb explodes

Tue Oct 04, 2016 10:41 am

VanLord wrote:
From what I can tell nothing has actually changed when it comes to secondary suites.  Below is the CRA information that greaterfool linked to.  Noting that the 2016 version of T4037 doesn't exist yet, so the CRA is still working on that, but I bet the three criteria that CRA currently uses to consider if the secondary suite is taxable or not,  will still apply.  Note the wording in question 8. "you MAY have to split the selling price and the adjusted cost base"...  I think What they have done is provided a much better mechanism to track the sale of property.  Which will allow them to go back and question these criteria (perhaps).  I think this is a prudent move though and as we have all discussed, catching the obvious cheater and hopefully this helps crack down on those cheaters, so I think its a great move to force this to be tracked.  Garth's worry about the government knowing your personal finances...let's face it they can know if they want to...Lets hope this actually works, I'm a bit skeptical that overseas buyers will actually be stopped, but that's likely where the extradition treaty with China comes in...This would then give them the ability to get those tax cheats who hide in China, while also allowing us to send back the criminals that escape to Canada.  Overall I think they are taking the right steps and it seems that all levels of government are starting to act.  However big brother-ish this all maybe, they are starting to take steps and will hopefully catch more of the cheats. 

http://www.cra-arc.gc.ca/gncy/bdgt/2016/qa11-eng.html

8. What do I report when I actually sell my principal residence, if I used part of it as my principal residence and another part for my business or to earn rental income?

If only a part of your home qualifies as your principal residence and you used the other part to earn or produce income, you may have to split the selling price and the adjusted cost base between the part you used for your principal residence and the part you used for other purposes (for example, rental or business). You can do this by using square metres or the number of rooms, as long as the split is reasonable.

Instructions will be provided in the guide T4037, Capital Gains 2016, on how to report the sale of your principal residence in this situation.

"May" is the key word there.  
The devil will be in the details.  Possible they will add clarity on how the basement suite is taxable upon disposition of a principal residence.  Right now the language is vague and open for interpretation - which taxpayers will, rightfully, interpret for their benefit.
If, for example, a PR has a basement suite and CRA decides they want the suite exempt from the PR exemption - it is very possible that having a basement suite is uneconomical.
 
VanLord
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Posts: 288
Joined: Fri Aug 24, 2007 3:52 pm

Re: Basement suite tax bomb explodes

Tue Oct 04, 2016 1:36 pm

reallyreal2 wrote:
"May" is the key word there.  
The devil will be in the details.  Possible they will add clarity on how the basement suite is taxable upon disposition of a principal residence.  Right now the language is vague and open for interpretation - which taxpayers will, rightfully, interpret for their benefit.
If, for example, a PR has a basement suite and CRA decides they want the suite exempt from the PR exemption - it is very possible that having a basement suite is uneconomical.

It wouldn't make sense for them to change this, as it will create a whole bunch of negative attention and will create more problems around affordability.  Just imagine the news reports of young people being kicked out of their basements suites because owners don't want the tax liability...It would be a huge nightmare...not to mention the consequences of retroactively changing the practice and catching a bunch of people who are inside the bounds of the current rules. 
 
Geyser
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Topic Author
Posts: 3565
Joined: Tue Jun 05, 2012 5:26 pm
Location: In a van down by the river

Re: Basement suite tax bomb explodes

Tue Oct 04, 2016 2:20 pm

VanLord wrote:
reallyreal2 wrote:
"May" is the key word there.  
The devil will be in the details.  Possible they will add clarity on how the basement suite is taxable upon disposition of a principal residence.  Right now the language is vague and open for interpretation - which taxpayers will, rightfully, interpret for their benefit.
If, for example, a PR has a basement suite and CRA decides they want the suite exempt from the PR exemption - it is very possible that having a basement suite is uneconomical.

It wouldn't make sense for them to change this, as it will create a whole bunch of negative attention and will create more problems around affordability.  Just imagine the news reports of young people being kicked out of their basements suites because owners don't want the tax liability...It would be a huge nightmare...not to mention the consequences of retroactively changing the practice and catching a bunch of people who are inside the bounds of the current rules. 

The new CRA action shouldn't be a huge problem in "normal" times when home prices roughly track inflation. Also, if we assume that house prices will be dropping for the next few years and then flat for a few more years, it could actually benefit a lot of homeowners because they will be able to declare a Capital Loss which can be used to offset future capital gains - just like Donald Trump.

 In a rapidly falling market (like now) it creates a tax incentive for recent buyers to maximize those parts of their homes used as self-contained rental suites and get a tax credit on their ongoing loss of equity. It could greatly ease the pain of what's probably coming.
 
VanLord
Real Estate Talker
Posts: 288
Joined: Fri Aug 24, 2007 3:52 pm

Re: Basement suite tax bomb explodes

Tue Oct 04, 2016 2:31 pm

Geyser wrote:
VanLord wrote:
reallyreal2 wrote:
"May" is the key word there.  
The devil will be in the details.  Possible they will add clarity on how the basement suite is taxable upon disposition of a principal residence.  Right now the language is vague and open for interpretation - which taxpayers will, rightfully, interpret for their benefit.
If, for example, a PR has a basement suite and CRA decides they want the suite exempt from the PR exemption - it is very possible that having a basement suite is uneconomical.

It wouldn't make sense for them to change this, as it will create a whole bunch of negative attention and will create more problems around affordability.  Just imagine the news reports of young people being kicked out of their basements suites because owners don't want the tax liability...It would be a huge nightmare...not to mention the consequences of retroactively changing the practice and catching a bunch of people who are inside the bounds of the current rules. 

The new CRA action shouldn't be a huge problem in "normal" times when home prices roughly track inflation. Also, if we assume that house prices will be dropping for the next few years and then flat for a few more years, it could actually benefit a lot of homeowners because they will be able to declare a Capital Loss which can be used to offset future capital gains - just like Donald Trump.

 In a rapidly falling market (like now) it creates a tax incentive for recent buyers to maximize those parts of their homes used as self-contained rental suites and get a tax credit on their ongoing loss of equity. It could greatly ease the pain of what's probably coming.

There you go, you can start airbnbing your garage!!!
 
Geyser
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Topic Author
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Joined: Tue Jun 05, 2012 5:26 pm
Location: In a van down by the river

Re: Basement suite tax bomb explodes

Tue Oct 04, 2016 2:54 pm

VanLord wrote:
"There you go, you can start airbnbing your garage!!"

That could be an excellent long-term strategy, particularly if the homeowner occupies the smallest space. 

Maximize your rental income and tax writeoffs in the downmarket and then, when the market finally enters its next bull cycle, evict the tenants and restore the Primary Residence status. That way you could enjoy tax-free Capital Gains in the up years and accrue big Capital Losses in the down years. Sounds good to me.
 
VanLord
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Posts: 288
Joined: Fri Aug 24, 2007 3:52 pm

Re: Basement suite tax bomb explodes

Tue Oct 04, 2016 3:02 pm

Geyser wrote:
VanLord wrote:
"There you go, you can start airbnbing your garage!!"

That could be an excellent long-term strategy, particularly if the homeowner occupies the smallest space. 

Maximize your rental income and tax writeoffs in the downmarket and then, when the market finally enters its next bull cycle, evict the tenants and restore the Primary Residence status. That way you could enjoy tax-free Capital Gains in the up years and accrue big Capital Losses in the down years. Sounds good to me.

Airbnb the house, you live in the garage!  Then you just need some big gains elsewhere to apply the losses to.

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