# ITA Rollovers, estates & primary residences



## nbw (Oct 31, 2010)

The answers I received on my last scheme were so wonderful that I am hoping for more of the same this time! As I posted last time, I am trying to figure out the most tax-effective way to get property into my hands from my parents. We are looking at a project start date in early 2011, so I am hoping someone can poke holes in my plan ASAP...

Here is the situation:

My parents own land with a house on it. I live in the house but want to tear it down and build a new house. My parents are more than happy to give me the property, they just don't want to pay any capital gain (and since they have owned it for 30 years (since 1990), the capital gain is about $300-400K right now!)

Here is the current thought:

1) Tear down the house.
2) Form a corporation.
3) Transfer the land from my parents to the corporation in exchange for 1 share in the corporation.
4) File an election with CRA stating that my parents and I (on behalf of the corporation) transfer the property to the corporation at FMV. 
5) I take out life insurance on my parents to cover the capital gain on the property from 1990-2011.
6) When the later of my parents pass away, life insurance covers the capital gain from 1990-2011. The corporation is on the hook for the capital gain from 2011-?.

Here are my questions:

A) How do capital gains accrue to the corporation from 2011 onwards, assuming the corporation assumes ownership of a vacant lot and then puts in $100s of thousands of $$$ to build a new house? If the land is worth $400K and I spend $600K to build a new house on the land, is the capital gain counted on any future sale price that is higher than $1M??? I can only imagine the $600K I spend counts for something...

B) Is there any way to take advantage of the ITA rollover into a corporation (i.e., step 3 above) as well as the primary residence exemption? I am wondering if I could 'sell' the new house + property to myself from the corporation, or some other scheme to take advantage of both the rollover and the primary residence capital gain exemption. 

Does anyone have any other thoughts? Would the primary residence exemption far outweigh the capital gain payment deferral of the rollover in this situation?

Thanks a ton!!


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## kcowan (Jul 1, 2010)

The capital gain on the land will become payable the year of the transfer not the year of death of your parents. The new corporation will have land development as its mandate so all expenses can be deducted in the year they are incurred. The eventual gain may never be realized (only upon disposition).


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## MoneyGal (Apr 24, 2009)

It's a lose-lose situation. You'd be exchanging the tax-free gains on a PR for capital gains tax payable by you on all gains on the land (and potentially the house) post-transfer. 

Plus it's really, really complicated and potentially unworkable from the get-go. Capital gains taxes are typically not deferrable, even as you have outlined using a s.85 rollover. 

There are much easier ways to work your way through this, but none of them allow you to avoid taxation or postpone it indefinitely. 

(1) Your parents retain ownership of the land and allow you to build a house on it. They leave the land to you in their will and capital gains taxes are due from the estate. 

(2) Your parents sell you the land using a demand mortgage, which allows the capital gains taxes to be set today and paid over a period of up to 5 years. When they die, the mortgage is forgiven in their will and the land is left to you with no debt or taxes payable.


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## Young&Ambitious (Aug 11, 2010)

Hey nbw,

Some other considerations: 

- your parents can designate the property as their personal residence, however the gains on any other properties in which they own would be need to considered. Also,did they rent out the property at any point and make any elections on its use as a rental property if applicable? 

- are net capital losses, which either exist already or could be created through the sale of "loser" loss status investments, available? 

- what portion of the 300-400k gain is related to the land versus the building amount. If the building were to be removed prior to the sale or transfer how would this effect the land value, would it decrease or increase? if used as a rental property a loss on the building value may be applicable.


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## Cal (Jun 17, 2009)

As per MG above, you could do #1 that she recommended and buy a life insurance policy on your parents that would pay out to cover the capital gains.

Or you could just go to a lawyer transfer ownership, and pay for the capital gains. Considering what you pay vs the value of the home, it is probably a good ROI nonetheless.


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## OhGreatGuru (May 24, 2009)

_My parents own land with a house on it. I live in the house but want to tear it down and build a new house. My parents are more than happy to give me the property, they just don't want to pay any capital gain (and since they have owned it for 30 years (since 1990), the capital gain is about $300-400K right now!)_

1. How large is the land? (The way you phrased your statement makes it sound like it might be more than a building lot)

2. Is the house your parents' Principal Residence?


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## MoneyGal (Apr 24, 2009)

Good discussion! 

They could also parcel out the land and sell/give nbw only the portion with the existing house on it, retaining the rest of the land and having the estate pay the CGT (possibly funded by a life insurance policy).


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## nbw (Oct 31, 2010)

Thank you all for your comments! They have certainly put a damper on my plans!! But I am still trying to move forward!!!

It sounds like the best plan is for my parents to retain ownership of the land, and for me to build the new house. I trust my parents, so I don't think that is an issue at all. 

I intend to keep diligent paperwork of the expenses of building the new house, so hopefully this will help figure out the actual capital gain many years from now when my parents both pass away. My understanding is that the money I put into building the new house will offset the capital gain in the future. Am I right in the following:

1) Land + building inherited by my father many years ago valued at $150K.
2) Land + building valued at $550K today, land only valued at $475K today.
3) Building gets torn down, $600K gets put into building a new house.
4) New building + land valued at $1075K.
5) New building + land sold for $1075K.
6) Capital gain upon sale in 5) = $1075K - $600K - $150K = $325K. Right?

Am I missing something? Thanks!!!!


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## kcowan (Jul 1, 2010)

Looks good. Just make sure that the valuations of the land at $150k/$475k are credible (i.e. certified appraisal or land transaction fee) and that all expenses are properly documented. Sometimes it is tough to get invoices from subcontractors.

Dont forget to deduct any selling fees. Also are there other improvements like landscaping or any contents included?

The only question would be when does the transfer take place. The $475k is at the start of construction but not when the property changes hands? You might need an updated land appraisal upon death.


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## MoneyGal (Apr 24, 2009)

I presume you are talking about a deemed disposition in (5), not an actual sale. 

You should run a couple of different scenarios presuming that the land and building appreciate at different rates over time, and using varying periods. You should then determine the PV of the future CG taxes owing on the building and compare it to the CG tax due today if the sale is made today. (I'd suggest using stochastic present value, given that both variables are uncertain; but a straight-line equation will do as well.) 

I also assume that you will build a house on this land, using your own funds...but because it is not your parents' principal residence, there will be a capital gain on the house when the last parent passes away, the house and land is subject to a deemed disposition (and CG tax), and then you inherit land + building tax-free. 

Just be aware you would be converting $600K away from an "investment" (your own personal PR) which accrues value with no tax owing, to an investment which will attract CG at your parents' rate. If the disposition is at their time of death, depending on the rest of their financial circumstances you may be subjecting this asset to a fairly high rate of future taxation. 

In addition, you should be aware that you are trading certainty for uncertainty. That is, you know what the tax hit would be today: you do not know what it will be in future. There is some value in certainty, although not everyone feels this way.


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## nbw (Oct 31, 2010)

Thanks again for the answers!

In terms of certainty vs. uncertainty, I think that the major determining factor for me is to defer taxes as long as possible. I am able to pay for building a new house right now, I am not able to pay for a new house + a sizeable capital gain. 

The problem with deferring the capital gain is that I don't get to take advantage of the primary residence exemption. It is a bit a tough choice!

I suppose another option would be to elect to pay the capital gain over 5 years, but even this may be too much.

If anyone else has any other thoughts please let me know.


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