# Capital Gains Tax on non income property



## Hoser59 (Nov 29, 2011)

Hello, I had a question regarding how the capital gains tax relates to my situation. 

4 years ago my father in law was injured at work and had to go on disablility. He could no longer afford to make his mortgage payments so I agreed to purchase the home from him for what he had left on his mortgage plus some additional CC and LOC debt. I paid roughly half of the fair market value at the time of purchase. As part of the agreement my in-laws would pay the utilities on the property and nothing else while I let them live there rent free. In the last four years I have made all the mortgage payments and property tax payments as well as general up keep expenses. My wife and I live in a rented condo in a different part of the city so we were never added to the title as the primary occupants. As I am not collecting any rent I cannot claim an income from the property.

The time has now come where they would like to move and my wife and I are considering our options. If we were to sell the property would we be liable for capital gains on the sale? The fair market value is currently about $125K more then I paid. If I understand the tax implications that would mean we would have to pay tax on $62.5K, is this correct? Are there any ways to avoid the capital gains since the home was not purchased to be used as an investment or income generator?

Conversely, if my wife and I decided to give up our apartment and move into the house we would now become the primary occupant. It is my understanding the the formula for calculating capital gain then becomes Capital Gain x (years as primary residence +1) / total years of ownership. Again, is this correct? We could defer the capital gain until the home was sold and every year we lived in it would reduce the amount of tax we would have to pay?

Any help would be greatly appreciated. We are new to all of this and had no mortgage or realestate experience when we made the purchase.


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## OhGreatGuru (May 24, 2009)

IMHO your deemed acquisition cost 4 years ago was the fair market value at that time, not the bargain price you paid for it. Your father-in-law essentially made you a non-taxable "gift" of 50% of the value of the property. There are no capital gains consequences to him because his deemed capital gain was eligible for the principal residence exemption, regardless of what either the actual or the deemed disposition price was. 

That should make your capital gain a little more reasonable.

From CRA T4037:
_Other transfers of property
...
If you sell property to someone with whom you do not deal at arm’s length and the selling price is less than its FMV, your selling price is considered to be the FMV. Similarly, if you buy property from someone with whom you do not
deal at arm’s length, and the purchase price is more than the FMV, your purchase price is considered to be the FMV._


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## MoneyGal (Apr 24, 2009)

No. I will find the specific tax code reference - but the cost of acquisition is the cost of acquisition or FMV, *whichever is less.* 

So in this case the cost of acquisition and thus the cost base for calculating the capital gain is not FMV, it is the purchase price. 

OGG your link does not cover this situation. It describes the capital gain for the FIL (no tax payable as it was his principal residence) and the capital gain if you pay more than FMV, but not the gain if you pay less than FMV.


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## Hoser59 (Nov 29, 2011)

So you are saying the capital gain calculation would be only between the FMV 4 years ago and FMV today? Not what I paid vs the FMV today? That would certainly make a difference as the appreciation in value has been minimal


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## MoneyGal (Apr 24, 2009)

Here is a good, easy-to-read link on this point that I've posted before:

http://www.mycasite.com/for_web/pages/articles/tax_part_2/pdfs/104_attribution_sale_property.pdf

And here's another, harder-to-read link:

http://www.johnsenarcher.ca/newsletters/0103.html

Because this was a principal residence which changed hands, there is no double taxation as dad would not have been taxed on the proceeds of disposition. However, son-in-law is not able to adjust his cost of aquisition upwards to the FMV at the time of disposition but must report his tax cost as the actual cost of aquisition. 

These are what are called the inadequate consideration rules in the Canadian tax code.


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## Hoser59 (Nov 29, 2011)

MoneyGal said:


> Here is a good, easy-to-read link on this point that I've posted before:
> 
> http://www.mycasite.com/for_web/pages/articles/tax_part_2/pdfs/104_attribution_sale_property.pdf
> 
> ...


Thank you very much, this is the way I understood it to work. So if I was to sell the property without ever having declared it my principal residence I would be liable for tax on 50% of the capital gain between my cost of aquisition and the FMV at time of disposition. if I chose to move into the home and have it become my principal residence is the capital gain formula I gave in my original post correct? (Capital Gain x years as primary residence +1 / total years of ownership)


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## MoneyGal (Apr 24, 2009)

(typing on phone) Yes


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## Charlie (May 20, 2011)

You mention you were never added to the title. Was there ever a sale ...or simply an agreement to transfer it later. Was the mortgage in your name -- or did you just pay your Dad's mortgage. Did you pay property transfer tax (or file the exemption forms). Did your Dad apply for property tax home ownergrants?

Possibly this is still your Dad's home legally? Meaning he could gift it to you now at FMV (less debts you acquire) and your cost base will bump to FMV?


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## OhGreatGuru (May 24, 2009)

Moneygal is correct as usual. But we should all be shocked & appalled about this rule. As noted in the Johnson Archer article this amounts to double taxation.

_*Disposition of property for less than fair market value (or a gift)*
....the taxpayer is deemed to have received proceeds of disposition for the property equal to its fair market value. Unfortunately, if the non-arm's length transferee purchased the property for proceeds less than the fair market value (and the transfer is not a gift), the transferee is not allowed an upward adjustment in computing his or her cost of the property. Again, this may result in an element of double taxation when the transferee subsequently sells the property. Interestingly, however, if the transferee acquires the property by way of gift, the transferee is deemed to acquire the property at its fair market value, so the transferee's cost of the property will be adjusted upward. Accordingly, in the case of a gift, there will be no double taxation._

If OP had paid his FIL the FMV, and FIL had gifted half the money back to him, OP would now be allowed to use the FMV as his ACB.

Somebody should appeal this rule, because it defies logic.


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## Hoser59 (Nov 29, 2011)

Charlie said:


> You mention you were never added to the title. Was there ever a sale ...or simply an agreement to transfer it later. Was the mortgage in your name -- or did you just pay your Dad's mortgage. Did you pay property transfer tax (or file the exemption forms). Did your Dad apply for property tax home ownergrants?
> 
> Possibly this is still your Dad's home legally? Meaning he could gift it to you now at FMV (less debts you acquire) and your cost base will bump to FMV?


The mortgage is my name and my wife and I hold the title. All taxes are paid by me and we don not qualify for any property tax home grants. My inlaws are just the occupants at this stage.


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## Hoser59 (Nov 29, 2011)

Thanks for your help everyone, it looks like my wife and I will move in, at least for a few years.


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