# capital gains



## Brooker (Jun 10, 2015)

New at forums so please accept my apologies in advance, and please bare with me.
Capital Gains.
Background; I am an equal silent partner, in two rental houses and am buying my partner out. My name is not on either property. My partner is in a high tax bracket (I am not) and believes i should pay half the capital gains my partner will have to pay. I believe my turn at paying capital gains will come when I sell and at that time my partner will not be sharing in that cost, so why would I share now in my partners and pay twice later. My partner also is suggesting I pay the current market value for the houses and then I take possession, and I get back what is left in my share of the profits, yet that would mean we are paying all the capital gains and in my partners tax bracket, not just what my partner would receive. My partner is the educated one with the high paying job so this perplexes me, because it does not make sense to me. 
My proposal for each house is; we take all money owed (mortgage/line of credit) plus selling costs (lawyer /land transfer fees), to total selling cost= $170k, subtract that from current property value, $300k, leaving $130k profit, divide that in half for us both, $65k for my partners share, add that to the total selling cost $170k = $235k this is what i should get a mortgage for and pay out my partner and my partner take care of their own capital gains of the profits my partner has incurred. Which would be $65K, taxed half of that being $32,500 and pay the capital gains of 48% (being my partners tax bracket). 
Looking for opinions and/or opinions.
One additional question; To assist my partner in the capital gains issue, I heard there was a one time capital gains exemption for personal tax relief for $50k, yet I have not been able to find info, is this true.


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## 0xCC (Jan 5, 2012)

I am slightly confused and I suspect that other people might be as well. Could you clarify some things?

"Partner" here means "life partner", i.e. spouse or "business partner"?

You say you are an equal silent partner but then you say that your name is not on either property. Have you made an actual cash investment in the houses now or are you just buying in now?


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## Woz (Sep 5, 2013)

That’s a messy situation. 

I think a lot of it hinges on whether you actually have a partnership. Have you signed a partnership agreement? Have you been receiving rental income? How have you been declaring that income on your taxes? It sounds kind of like you have an informal arrangement which makes it all a lot more complicated.

The one comment I would add is that the deemed disposition for capital gains is always done at fair market value. Even if he did sell it to you for less than $300k, he would still need to pay capital gains as if he sold it for the full $300k. Furthermore, your cost base is always determined by what you actually paid, so if you paid less than $300k then you’d need to pay capital gains on that amount again when selling resulting in double taxation.


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## Azim Dahya & Co CGA (Jun 3, 2015)

0xCC said:


> Have you made an actual cash investment in the houses now or are you just buying in now?


also to add on to this question, how much did you pay for the property if you did and when did you pay for it? most importantly though is have you been reporting rental income? ( if there is rental income)

source: www.advancedtax.ca


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## Brooker (Jun 10, 2015)

Thank you all very much for your replies and your time. Again being new Im trying to reply to all in one so as not to duplicate answers. 

OxCC; My partner is a business partner (use to be in a relationship). I was the maintenance guy, she did the paper work. We were to understand you could not write off work being done on the rental units if you owned them, as I am the maintenance guy we left my name off the properties to write off the work through me. After realizing that was untrue we planned at some point to have my name added to the properties yet she failed to do the paperwork and to me was not an issue (until now). We originally used her line of credit to buy the houses and then after repairs I did, the increase in value that created we planned to switch the credit lines over from her line to the rental houses, which was doable yet that paper work also was never done either (believing again it was not an issue). additional info see below...

Woz; Yes a messy situation yet I do not believe it has to be. We do not have any signed agreement and have an informal agreement. We have an amicable relationship still (although no longer in a personal relationship), so we are trying to find the best way out for both so we may both move on. As she lives far away and I live close to the rentals we agreed for me to buy her out. Understanding fair market value yet the fluctuation from the one house 300k down in plans to remove my share profit of 65k is negligible to the perceived market value so am thinking should not be an issue at 235k and the other house is much the same yet smaller. 

Azim; We paid app 180k for the one house 5 yrs ago that from our research we now value at 300k. Yes the houses are making rental income which is being wrote off through me as the maintenance man which i am claiming due to my low tax bracket, yet I have not collected the money (as the yearly maintenance has been minimal) and she has been folding it back into the mortgage and line of credit, .

I understand capital gains is complicated when using the system in the most beneficial way. I understand you pay capital gains on the difference from purchase price to sale price and then taxed on half of that profit. 
To narrow this down:
My questions are; how do they evaluate the tax percentage they charge on capital gains, is there a set rate (i thought it was by whatever personal tax bracket you were in).
Is there in place a one time 50k tax exemption on capital gains she can use. (she will be making app 100k between the houses).
Is it not fair to say simplistically, I get a mortgage on each house, paying her fair market value minus my profit margin from the houses and she worry about her own capital gains as i will when the time comes for me to sell and do the same.

At any time my partner could have added my name to the properties, put lines of credit on the houses and removed hers. Had this happened if I was to buy her out would I not just pay her out and her pay her own capital gains. 
Is there an easier way by me having my name now put on the properties, and then buy her out, yet that sounds more complicated and time consuming. 

Thanks again


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## cheech10 (Dec 31, 2010)

Wait, you were "paid" to perform maintenance (and therefore paid income tax on it) but the funds were then used to pay down the mortgage and line of credit? This should have increased your equity in the "partnership" (essentially you are investing funds into the enterprise), but your lack of a formal agreement may make this difficult. Do you at least have detailed records for this business? I think you need an accountant and lawyer ASAP to sort this out. And next time have paperwork made up to define any business partnership.


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## Brooker (Jun 10, 2015)

thanks,
yes, it is kinda messy yet the maintenance and everything is all worked out. We are not fighting over any issues just trying to agree on the capital gains issue. As the properties are in my business partners name, she believes I should buy the properties for full market value (agreed between us) and split in paying her capital gains from it then give me back my share of the profit when purchased. But i do not believe I should have to do this, if my name was put on the properties as it should have been, it would simply be me buying her out of her share and her paying her capital gains. So I want to subtract my full share of the profit, from the full market value, buy the houses for this amount and let her pay her own capital gains as when I sell in the future I will have to pay my own capital gains then. I have a couple people in business that have dealt with capital gains that understand and agree with me yet as it is complicated I need more feed back for my own security in my beliefs I am right before I press this solution.


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## Woz (Sep 5, 2013)

If it was setup properly then what you’re suggesting would be fair.

However, if there’s no paper trail then it’s not clear to me that the CRA would view you as having ownership in the property. If that’s the case then she would be forced to claim the full $130k on her taxes as her own capital gains and when you ultimately sell you’d be paying the capital gains on any appreciation beyond the $300k valuation.


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## Woz (Sep 5, 2013)

One more thing. Your plan still involves buying the property below fair market value (full market value minus your profit). You can say that $65k is negligible on a $300k property, but if the CRA disagrees then again she’d be forced to pay the capital gains on the full $130k profit and worst of all you would need to pay tax again on $65k of that profit when you sell.


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## Brooker (Jun 10, 2015)

agreed, fair is what I am looking for, and not get confused and throw our hands up and just give our profits to the government more than needed, and when we started this separation it was far from fair on my side of it as her plans originally involved her keeping the houses and giving me a minor cash buy out (she had bad coaching) which I stressed would not be a good idea if she intended me to keep my fondness for her, which she immediately regrouped. I have already taken some additional tax cost to make our agreement through the years easier so am still on the giving side of this at this point. 
The CRA I do not know how they would look at it. I am thinking I just buy it as a purchaser as there is no contract and considering the property was only purchased for app 190K, my app buying cost as i said of app 236k would not be far off a considered market price, I see no reason they would question. In the big picture there is no misconduct here just lack of proof of my ownership. Trusting in the end if anything did arise we would have to challenge any ruling against us in court which there is no proof either we were not partners in this.


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## Brooker (Jun 10, 2015)

My offer that believed to be fair.
approx #s
Est Market Value 300k - 170 k (selling cost ( Mortgage/line of credit owing, lawyers/landtransfer/terminate current mortg)) total profit = 130k 
130k divided by 2 for personal profit = 65K. (Total owed) 170K + 65k (her personal profit) selling price =235k

My profit stays with the house for me to pay CG on when I sell. original Purchase price of 190k from 235k (selling price) She would pay CG on half of 45k being 22500. 
Which is less than half the CG of 65k being 32500 she would pay, if I paid full price, 300k and half her capital gains involving me paying twice.....

does this make sense


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## Woz (Sep 5, 2013)

I agree I wouldn’t just throw up my hands and give up but there are times when it might be best to get professional advice. If you get audited, I think there’s a decent risk that they’d see this wasn’t an at arms-length transaction and you could face some consequences.

It'd obviously be a bit luck of the draw whether you get audited or not, but large gains do often attract more attention.


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## Brooker (Jun 10, 2015)

I agree yet in the end this is not wrongful doing. It is what it is. Proving is the problem yet that also works both ways, so the risk is limited as it is the truth. 
I still out of all this have had no direct reply from anyone to my questions: is there a one time exemption for personal Capital Gains and if so is it 50k or what is it ( I know business and farms is large but that is not this), also to my proposal to resolve my buying out my partner and if it is viable and fare.


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## Woz (Sep 5, 2013)

There is no one time capital gains exemption other than for farms and small businesses. There used to be a $100k personal exemption but that was removed in 1994. There are some options to defer capital gains but it would’ve needed to be structured properly.

Your offer favours her a bit because you’re paying more than your share of the capital gains. You guys have $130k after selling ($300k-$170k), but $20k of that ($190k-$170k) came from principal repayment which isn’t taxed. If you sold for $245k and had her give you $10k for your share of the principal repayment then it’d be completely even. She would have a $55k capital gain plus $10k of principal and you would have a $55k capital gains if you sold for $300k plus $10k of principal.


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## Brooker (Jun 10, 2015)

Hey Woz, thx for sticking with this and your input on the exemption. (I was away from internet)

I see what you mean, in the end I would pay more and thanks, yet if I paid her the mortgage at 235 then that 10k would then still be in the house so would in a way still be mine just not in a $ amount, and understanding that it is more complicated than that because of the difference between 10k in my pocket as opposed to the 20k being split through the principle from the gains and taxed.... but I need to cut my loses, as although I believe my proposal is far farer and although gets me out of double paying capital gains (with the plan I am buying her out to sell in the future) convincing her is going to be tough because she is adamant that if we share in the profits we should share in the capital gains costs as well but the way I have it figured, her way even with me sharing in the capital gains she still would pay more tax than doing it my way with a purchase that leaves my profit in the house. She also will get CCG benefits which again would lower her CG costs. I wish it was easier to explain yet again I thank thank you.

Although most can not grasp the concept, I am trusting you believe my proposal to be fare and sound enough for me to proceed

Thanks again 
B


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