# Capital gain and best way to avoid it?



## v3rd1ct (Mar 5, 2017)

Hello,

I have 2 properties in Vancouver, one of them I live in (primary resident) and another house where my son with his wife lives. They have lived at this property since we purchased it about 5+ years ago. I am the owner of both properties (they are not on the title of the second house), I pay the mortgage for both houses. They run a home based business from the house to get by (daycare).

My plan was to gift this house to my son so that he can become the owner on the title and this would be his principal residence. For this example, lets assume the house was purchased for $250,000 and the property has boomed and is assessed at $500,000 today.

My son will likely choose to sell this house to move out of the urban city and move to a city where cost of homes is not as crazy, so they will use the profit to fully pay off the left over mortgage and to buy out their new place without needing to go to the bankers.

The problem here is the tax man and the "Capital Gain tax".

I obviously (in my best interest) want to pay as little as possible to the tax man, I'd like to know what I can do to minimize the capital gain or to legally avoid it as much as possible.

I understand that if I gift the house to my son, the CRA views this gift as a transfer of ownership and as such I would have to pay taxes (not the recipient, in this case my son).

I read somewhere that this tax can be avoided if the house qualifies for principal residence when I transfer the title to my son? However if my son decides to sell he would have to pay capital gain on the property? I also read that the quicker my son sells the house, the lower the chance of capital gain.

I obviously need to go talk to a real estate lawyer to make sure all my bases are covered, but I wanted to do my own research ahead and inquire with others that have experience in this field so that I can educate myself a bit around this topic before I go get my ear talked off by an real estate agent.

How can one transfer a second property to their loved ones and dodge the tax man?!

Anyone able to pitch in some thoughts?


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## mark0f0 (Oct 1, 2016)

If you've exhausted all the tweaks concerning principal residences, one thing the CRA allows you to do is to sell a property gradually over the next 5 years, fixing the sale price of the entire house (including the portion "sold" up to 5 years down the road) at today's prices. 

So you could sell the property (or gift) the property to your son in 1/5th chunks for the next 5 years, and, if the transaction is structured properly and in accordance to the "capital gains reserves" rules, only include 1/5th of the overall capital gain on your income tax return yearly. Without being forced to obtain an appraisal each year that you transfer additional equity. Hence, potentially lowering the effective tax rate on the capital gains.

It might be possible to finesse such a strategy to involve a 3rd party, although they'd have to agree to it, and the contract would have to be acceptable to the CRA and stand up to audit, meeting legal tests required of the legislation. A buyer may view entering into such a contract for a gradual, optional purchase of the property as being a superior option in a highly overheated real estate market. One big drawback, however, is that traditional financing would not be available. You may be forced, in such a scenario, to act as a mortgage-secured financier for the buyer. Something you may or may not be prepared to do.



> However if my son decides to sell he would have to pay capital gain on the property? I also read that the quicker my son sells the house, the lower the chance of capital gain.


Your son would acquire the property (or deemed to have acquired it) at the lower of the actual consideration that trades hands (so don't be dumb and gift it or sell it for $1), or the fair market value. Whichever is lower. So if you sell it for $1 to him, for instance, he would have to pay capital gains on the entire value of disposition on the property (and you'd still have to pay capital gains tax on the gift at FMV - your adjusted cost base). 

Hence, obtaining proper professional advice is important here. From a lawyer or other licensed tax advisor, not a real estate/Realtor. With Vancouver/Toronto RE falling in price these days, its quite possible to have significant losses, not gains which need to be considered in the calculus.


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## Spudd (Oct 11, 2011)

I'm no expert, but why would the son have to pay capital gains - it is his principal residence, right? However, I think the parent needs to sell it to the son at fair market value and pay the appropriate capital gains.

http://www.moneysense.ca/save/taxes/capital-gains-when-selling-property-to-family/
http://www.thebluntbeancounter.com/2013/05/transferring-property-among-family.html


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## carverman (Nov 8, 2010)

Spudd said:


> I'm no expert, but why would the son have to pay capital gains - it is his principal residence, right?


Son is currently not on title as owner or co-owner.


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## twa2w (Mar 5, 2016)

Whether you sell or gift the property to your son, you will, in the eyes of the tax man, have disposed of it for fair market value. Assuming you son lives in it after title is in his name, it will be his principal residence. Any future gains would be exempt from tax as his principal residence.
You could avoid ( actualy defer) paying capital gains tax on it providing you have never charged your son rent on it.
You sell or gift the property to your son for fair market value. You declare the sale on schedule three as your principal residence avoiding capital gains tax.( temporarily)
When you sell your current Residence in the future, you will then have to declare that for the 5 years you owned the second property, you do not have the principal residence exemption so you will pay the gain when you sell your principal residence.
So say you sell you home in 15 years and have owned it a total of 30 years.
You paid 300,000 and you sell it for 1,500,000 for a total gain of 1,200,000.
You have personal residence exemption on 25 out of 30 years on the 1,200,000 gain so you would have a capital gain for tax purposes on 1/6 of 1,200,000 or 200,000.
This is a little oversimplified so talk to your accountant. There is a rule around inhabitation but it is pretty loose and a night or so spend at the son's house is enough.
Many people do this with a cottage


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