# Selling Second Property, Taxes?



## KaeJS (Sep 28, 2010)

I'm considering selling my second investment property in October.

I was in a rush and the deal was going through and this property is listed under my name as a second residence (not primary). How can I lower my capital gains tax? 

Can I start a corporation and then transfer the property into ownership of the company? If I do this, does this trigger immediate tax implications (like having to pay any accrued capital gains at the time of transfer)?

If this can be done, is this even beneficial as I will likely want the funds out of the corporation ASAP to use to invest personally, and not invest under the corp name. I assume if I take the funds right away, the corp would have to take the capital gains hit.... Where if I just withdrew like 20,000 a year for multiple years it wouldn't be as bad?

I really don't know what I'm talking about. Never sold a property before.

How can I most efficiently reduce my tax implications for a second property that is listed under my individual name?


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## Mortgage u/w (Feb 6, 2014)

Not much you can do at this stage. Transferring the property to a corp is the same as selling it to someone else. Capital gains will be triggered regardless. Only way to shelter those taxes was to have had the corp own the property from the beginning.

How to reduce your tax implication? Find as many expenses possible that are eligible to reduce your capital gain.


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## KaeJS (Sep 28, 2010)

Mortgage u/w said:


> Not much you can do at this stage. Transferring the property to a corp is the same as selling it to someone else. Capital gains will be triggered regardless. Only way to shelter those taxes was to have had the corp own the property from the beginning.
> 
> How to reduce your tax implication? Find as many expenses possible that are eligible to reduce your capital gain.


I feared that was the case, and I knew that would probably happen when I was signing the deal.

Good call on the expenses to reduce cap gains.

Thank you.


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## Yasehtor (Oct 12, 2018)

KaeJS said:


> I'm considering selling my second investment property in October.
> 
> I was in a rush and the deal was going through and this property is listed under my name as a second residence (not primary). How can I lower my capital gains tax?


Per the following link

Tax Q&A: Tax Planning Strategies For Cottage Owners

_"A cottage can be designated as a principal residence (even if you don’t use it as your primary residence) as long as it is “ordinarily inhabited” at some point during the year. Ordinarily inhabited includes living at the cottage for only a short period of time as long as the main reason for owning it isn’t for the purposes of earning income. The CRA doesn’t consider incidental or occasional rental of a property sufficient to prevent it from qualifying as a principal residence."_

You may be able to claim it as your principal residence, regardless of how it was listed, provided it's main purpose isn't to earn income. However, you say it is a second investment property so this option may not apply. If it is an option, you would have to do the math to figure out whether it is beneficial to use the PRE on it.


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## KaeJS (Sep 28, 2010)

Unfortunately, it wouldn't make sense for me to do that.

My primary residence is sitting on like 700k of capital gain. My investment property is only 300k capital gain.


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## the_apprentice (Jan 31, 2013)

Sounds similar to my situation. I sold and wasn't able to find anything to lower the taxes.


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## OptsyEagle (Nov 29, 2009)

There is nothing you can do. By the way, I do believe you can transfer personal assets to a corporation at the ACB but once you sell the property inside the corporation, the capital gains tax will be payable and the corporate tax rate, combined with the personal tax rate to get it all out again, is unlikely to be favourable to you.

CRA is ahead of you on this. You did make a profit. They want their cut.


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## OptsyEagle (Nov 29, 2009)

One last thought. I know you are a fairly smart guy so I imagine if this was applicable to you that you would have pointed out this detail in your original post, but if the deal is not done, knowledge of taxation can be very useful to the one that possesses it.

The hail mary opportunity I am referring to is the ability to take a "capital gain reserve". If I recall correctly this only applies if the buyer does not pay you all the money for the purchase up front. So for example if you take back a mortgage as part of the proceeds of sale, then you are allowed to take a capital gain reserve. Basically the government recognizes that although you sold the property you did not take possession of all the proceeds and therefore they let you declare the capital gain over a number of tax years as opposed to all at once. Obviously this can reduce the tax load considerably, at times.

Again, if you are intent on taking all the money up front, and if you know little about the buyer, I would recommended that first, then this tax opportunity will unfortuneately not apply. If the deal is not done, it would not hurt to look up the details of a "capital gain reserve" so that you are armed with that knowledge in case the opportunity to benefit from it, arises.

Good luck.


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## KaeJS (Sep 28, 2010)

^ Thank you. I was not aware that was a thing.

The deal is not done, as I have not even listed the property and it still has a tenant at the moment. I would prefer to get all the money up front when I sell as I won't know the buyer.

I think my best recourse is to write off any expenses and then use up all my RRSP contribution room with the proceeds of the sale to reduce taxes as much as possible. I believe I have about 40k of unused room still. It won't be wonderful, but it will help.

Edit: typo


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## m3s (Apr 3, 2010)

Make the closing date in 2023 and then you don't have to pay the capital gains tax until end of April 2024.

If you happen to have any capital gains losses harvest them to offset the gains as well. Make sure to avoid wash trades

Heck in 12-15 months you could earn 19% APY on UST Anchor protocol to pay the tax bill


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## Jimmy (May 19, 2017)

Do you have any RRSP room left as their deduction can reduce any type of taxable income? I had RRSP room so I bought RRSPs and reduced my gain on a 2nd property to practically nil.


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## KaeJS (Sep 28, 2010)

I only have 40k left.
But yes, I will max it out when I sell.


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## Mortgage u/w (Feb 6, 2014)

At the end of the day, if you owe capital gains, you haven’t lost money. I understand it’s upsetting to give the government their share, but unfortunately, that’s just how it is.

question. Why not just keep the rental if it’s generating money? Assuming you’re cash flow positive, keep it and use it as leverage for whatever else you plan on doing with the gained equity.


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## KaeJS (Sep 28, 2010)

I am about $400/month CF+.

Interest rates and inflation have me freaked out. The property was purchased for 400k 2 years ago and is worth maybe a little north of 700k now. It has almost doubled in 2 years...

I could be wrong - but I'm not sure how much higher it can go. It's a tiny little condo townhouse with no garage and only 1 parking space. The interest rates will be a headwind and the housing crisis is becoming a bigger public and political issue.

I would likely sell and place all the funds into stocks.

I understand that supply of housing is scarce in Canada, lots of immigration, rates are still "low", etc...

But at some point it must cool down or level off. All the Realtors and people "in the know" say housing will keep going, but I'm not sure if I completely believe that. Part of me does, for sure. There are compelling arguments on both sides.


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## Mortgage u/w (Feb 6, 2014)

I would disagree. Property values will always increase in value over time. I would definitely hang on. And interests rates are nothing to be afraid of. Regular rent increases will more than offset that. 

Not sure what your mortgage balance is but a value of $700k, you could leverage $560k. Invest the excess in stocks if you please and continue reaping the benefits of RE. OR, buy another property. 
Just my two cents.


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## KaeJS (Sep 28, 2010)

Maybe you are right. Not saying you are wrong by any means. I see exactly what you are saying and am in half agreement with you. This is why I am not listing yet. But it has been on my mind.

The mortgage is 300k.


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## Mortgage u/w (Feb 6, 2014)

Well, it’s food for thought. Financially it makes sense. You just have to decide if maintaining a property is what you really want.

$260k provides many investment opportunities.
I’d rather keep that money than pay the government on a $300k gain.


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## Mortgage u/w (Feb 6, 2014)

KaeJS said:


> ... But at some point it must cool down or level off. All the Realtors and people "in the know" say housing will keep going, but I'm not sure if I completely believe that. Part of me does, for sure. There are compelling arguments on both sides.


No one has a crystal ball so we can't predict the future. But, cashing out is essentially what you are doing - predicting.

Property values will definitely cool down and level off. When, we don't know. And even if they do, its not much of a concern for you. Given your situation, you are already committed and realized a solid gain. Even if the value levels off, your gain is secured. You have plenty of time to work on increasing your cash-flow. Its like giving yourself a raise every year. On top of that, your tenant continues to pay-off your mortgage.

A downturn in market value is also possible, but highly unlikely. You have to understand and look at the overall economy to be assured of that.


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## Eclectic21 (Jun 25, 2021)

KaeJS said:


> ... How can I most efficiently reduce my tax implications for a second property that is listed under my individual name?


First thing is to make sure you've documented all of the expenses that will reduce the capital gain.








TaxTips.ca - Property Rental - Purchase and Sale of Rental Property


TaxTips.ca - Purchase and Sale of Rental Property; Allowable capital loss can only be used to reduce taxable capital gains




www.taxtips.ca





Second thing is that any capital losses (in the year of the sale or that have been previously banked) can be used to reduce the capital gain.








TaxTips.ca - Capital losses, losses carried forward & back, superficial losses


TaxTips.ca - Treatment of capital losses for tax purposes, inclusion rates for capital gains and losses, carrying losses forward and back, superficial losses.




www.taxtips.ca





Third thing is all the usual deductions (ex. RRSP), credits (ex. charitable donations) and the like that are available in any given tax year.


Though while I expect the house price gains to slow down and maybe raises in interest rates might cool the market a bit, I'm not sure I'd sell at this point. Keep an eye on the market for sure but probably not sell just yet.


Cheers


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## KaeJS (Sep 28, 2010)

^ Thank you.


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## andrewf (Mar 1, 2010)

OptsyEagle said:


> There is nothing you can do. By the way, I do believe you can transfer personal assets to a corporation at the ACB but once you sell the property inside the corporation, the capital gains tax will be payable and the corporate tax rate, combined with the personal tax rate to get it all out again, is unlikely to be favourable to you.
> 
> CRA is ahead of you on this. You did make a profit. They want their cut.


No, I think transferring to a corp is at FMV.


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## OptsyEagle (Nov 29, 2009)

andrewf said:


> No, I think transferring to a corp is at FMV.


I believe assets can be transferred to a corporation at any value the shareholder chooses, between ACB and FMV. I believe the reason CRA allows this is to make it easier to invest assets into a company where CRA hopes it allows them to conduct more business. Anyway, I think they call it a section 85 transfer and this kind of explains it. I am not an expert on it but I remember it coming up a few times in my dealings, when I use to work for a living.






Transfers to the Corporation: Section 85 Rollovers | Legacy Tax + Trust Lawyers


I. INTRODUCTION S.85(1) of the Income Tax Act (Canada) (the “ITA”)[1] allows a person to transfer property to a taxable Canadian corporation on a tax-deferred basis. This rollover allows a person to defer the recognition of income, capital gains and/or recapture. II. ELIGIBILITY...




www.legacylawyers.com


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## m3s (Apr 3, 2010)

Why not borrow as much as you can from both properties. No tax so you could end up with about the same amount to re-invest. Interest tax deductible via the Smith Maneuver

Robert Kiyosaki has a lot of US real estate tax strategies on YouTube. If I remember he uses a lot of business property and tax benefits of business expenses



> In Canada, even though interest on a mortgage is not tax-deductible, the interest paid on loans for investments is tax-deductible. (It's important to note that this does not extend to loans taken for investments made in registered plans, such as registered retirement savings plans (RRSPs), and other tax-free accounts, because they are already tax-advantaged.)
> 
> For the Smith Maneuver, a borrower needs to obtain a readvanceable mortgage, which is slightly different than a conventional mortgage. A readvanceable mortgage consists of a mortgage and a line of credit–called a HELOC, or a home equity line of credit–bundled together.3 A HELOC allows you to borrow up to a certain percentage of the value of your room.


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## KaeJS (Sep 28, 2010)

m3s said:


> Why not borrow as much as you can from both properties. No tax so you could end up with about the same amount to re-invest. Interest tax deductible via the Smith Maneuver
> 
> Robert Kiyosaki has a lot of US real estate tax strategies on YouTube. If I remember he uses a lot of business property and tax benefits of business expenses


I would if I could.
I am tapped out.

I don't think anyone would lend anything more to me lol


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## Synergy (Mar 18, 2013)

OptsyEagle said:


> I believe assets can be transferred to a corporation at any value the shareholder chooses, between ACB and FMV. I believe the reason CRA allows this is to make it easier to invest assets into a company where CRA hopes it allows them to conduct more business. Anyway, I think they call it a section 85 transfer and this kind of explains it. I am not an expert on it but I remember it coming up a few times in my dealings, when I use to work for a living.
> 
> 
> 
> ...


I believe rollovers have to take place at FMV. This is why most rollovers will include a price adjustment clause, etc. To protect one in the event the CRA disputes the valuation.

I just finished going through this as a result of an oversight on a share purchase agreement.


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## OptsyEagle (Nov 29, 2009)

Synergy said:


> I believe rollovers have to take place at FMV. This is why most rollovers will include a price adjustment clause, etc. To protect one in the event the CRA disputes the valuation.
> 
> I just finished going through this as a result of an oversight on a share purchase agreement.


That is not how I understand a section 85 transfer. Not sure what you did but the link I posted seems to contradict what you are saying.


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## Synergy (Mar 18, 2013)

OptsyEagle said:


> That is not how I understand a section 85 transfer. Not sure what you did but the link I posted seems to contradict what you are saying.


Here's a link with a good example.








Section 85: Rollover and Income tax planning | Siskinds Law Firm


A Section 85 Tax Rollover (“rollover”) is term used to describe a special tax technique that allows a taxpayer to defer all or part of the income which Through Section 85 of the Income Tax Act, certain types of eligible property can be transferred to a transferee corporation. Eligible property...




www.siskinds.com





Helps to explain the importance of knowing the fair market value, etc. But you are correct, the actual transfer amount can be at an elected value.


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## OptsyEagle (Nov 29, 2009)

Synergy said:


> Here's a link with a good example.
> 
> 
> 
> ...


Sure. But at the end of the day an asset, that has an unrealized capital gain on it now, is transferred to a corporation and the capital gains tax is deferred. That was my point. How it is done precisely I will leave to the accountants.


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## Synergy (Mar 18, 2013)

OptsyEagle said:


> Sure. But at the end of the day an asset, that has an unrealized capital gain on it now, is transferred to a corporation and the capital gains tax is deferred. That was my point. How it is done precisely I will leave to the accountants.


Oftentimes you will need a lawyer as well.


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## Numbersman61 (Jan 26, 2015)

The OP indicated that the intention was to sell the property. Section 85 rollover does not work since ACB in corporation is elected amount. If tax payable by corporation is less than in the individual’s hands, CRA will assess based on GAAR (General Anti-Avoidance Rule).


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## Retiredguy (Jul 24, 2013)

If your intent on selling, I'd get on with it. Your deductions are pretty much baked in. I know it's just speculation being talked about but you could wake up to find the CG inclusion rate has been upped to 75%, which would mean an additional CG tax of about ~40,000 (using the top BC CG rate) The NDP stated they would do it in the last election and they hold the balance of power for Trudeau/Libs and IMO they would like to do it too. Personally I believe its coming and I crystallized some equity gains in 2021 for that reason. If I was right I'll smile and regret not doing more, and if it doesn't happen I'll still be happy.


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## m3s (Apr 3, 2010)

I much prefer the US long term capital gains at 0-20% brackets

Short term capital gains less than 1 year are taxed as ordinary income. Makes sense


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## KaeJS (Sep 28, 2010)

Regardless -

The housing market scares the shyt out of me right now. The more I think about it, the more I want to sell.

It's not sustainable.

Rates are going to increase.
The upside is probably limited at this point.
Housing is becoming a political issue.

Lots of factors are scaring me.


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## Mortgage u/w (Feb 6, 2014)

I recall many times where everyone was skeptical that prices couldn’t go any higher. They were all wrong. Prices kept climbing.

Vancouver bubble in 2015? No longer the case.

Covid hit and everyone was sure this time was the end. Wrong again. We experienced record sales.

For 15 years everyone was saying rates cannot go any lower. Rates kept dropping.

this time is no different. Whatever happens, happens. RE is a long term commitment.


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## KaeJS (Sep 28, 2010)

Rates are not going to stay low.
And homes have increased in value in insane amounts in the last couple years. Not just by small amounts.

This isn't just about rates and high mortgages...

It's about stagnating wages, higher living costs, etc.

There are lots of factors at play.


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## m3s (Apr 3, 2010)

Mortgage u/w said:


> Covid hit and everyone was sure this time was the end. Wrong again. We experienced record sales.
> 
> For 15 years everyone was saying rates cannot go any lower. Rates kept dropping.
> 
> this time is no different. Whatever happens, happens. RE is a long term commitment.


The only reason we experienced record sales was thanks to money printing and low rates

Rates can't go any lower.. they just started to rise. Boomer demographics are fading into long term care homes and the next generation is in a very different predicament

I'd argue this time is different


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## Mortgage u/w (Feb 6, 2014)

m3s said:


> …..I'd argue this time is different


Sure you can argue it. But the same line where “this time is different” has been used time and time again.


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## Mortgage u/w (Feb 6, 2014)

KaeJS said:


> Rates are not going to stay low.
> And homes have increased in value in insane amounts in the last couple years. Not just by small amounts.
> 
> This isn't just about rates and high mortgages...
> ...


you need a catalyst for major downturn to occur. Right now, the only threat would be if Canada meddles with Russia affair and triggers a war with them. HIGHLY unlikely.


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## m3s (Apr 3, 2010)

Mortgage u/w said:


> Sure you can argue it. But the same line where “this time is different” has been used time and time again.


Recency bias

Just because the perma bears have made inaccurate noise in recent times not mean the people with a history of being more accurate can't raise a flag when things do change

Most people lack the intelligence to separate the signal from noise


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## KaeJS (Sep 28, 2010)

The upside is limited.
Even if I sell and I am wrong, I highly doubt we are going to see continued 20%+ gains in 2023 and beyond.


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## Mortgage u/w (Feb 6, 2014)

I could understand the fear of what’s to come. But it’s essentially timing the market. Is the right move pulling out of RE and investing in oil? How will you know when to get out of oil and back into RE?
You know all those stats on staying invested vs buying/selling? Same applies to RE.


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