Capital-gains myth busted

by REP19 Aug 2015
By John Tenpenny

The growing number of rental property owners looking to minimize capital gains taxes at the point of sale may be in for a rude awakening and a hefty fine, cautions one property expert.

Seasoned mortgage broker Ron Butler, with Verico Butler Mortgage, says he’s often asked about what if any tax benefits accrue to a seller who lives in one unit of an investment property but rents out the rest. His answer is to make sure they clearly understand the rules.

“You can only avoid capital gains by selling a property that you’ve declared to be your owner/occupied dwelling. You’re only allowed one capital gains-free transaction, which is the sale of your personal residence.”

What some owners attempt to do is to develop a scenario by which they appear as the owner/occupying resident of a property that is, in fact, a rental.

In order to prove to CRA that a property is owner/occupied some people attempt to document occupancy by having such things as driver’s licences and tax filings in the address of the property.

If you think it’s easy to get away with, you’re in for a shock, like the hundreds of people CRA caught two years ago after cracking down on condo flippers. Over 600 income tax audits were completed with almost half of that number receiving penalties.

“Some people were buying properties in their children’s names, typically condos, and saying they were living there, while in fact it was being rented,” says Butler.

The penalty for attempting to avoid capital gains taxes is double, plus interest, from the date of the transaction.

For the mortgage broker’s part, says Butler, it’s “our duty to know when we’re applying for the mortgage whether it’s a rental property or not.”

“I’ve seen people who try this and get rental insurance and that information is sent to the mortgage company and they immediately cancel the mortgage because it was claimed as owner/occupied and now they have rental insurance.”

COMMENTS

  • by 8/19/2015 12:33:31 PM

    Here's the moral to this story. Don't lie.

  • by 8/19/2015 12:50:25 PM

    Could the editor of this article proof read before print - the statement that you are only allowed one tax free transaction being your principle residence, and that is correct but you should have clarified how many times a person is allowed to sell that principle residence.
    Once a year, 5 times a year or if truly your principle residence and a sale happens befores a reasonable amount of time occupying that home happens CGT may apply but also may not and simply put flip houses not used as a principle residence is subject to tax.

  • by 8/19/2015 2:20:41 PM

    There is a huge difference between the words "principal" and "principle".

    Principle is: a fundamental truth or proposition that serves as the foundation for a system of belief or behavior or for a chain of reasoning.

    Principal sum is: the original amount of a debt or investment on which interest is calculated

    .... (according to Wikipedia)
    Education & organized religion
    Principal (academia), the chief executive of a university or college
    Principal (education), the head teacher of a primary or secondary school
    Principal or dean, the head of a cathedral or collegiate church

    Law
    Principal (commercial law), the person who authorizes an agent
    Principal (architecture), licensed professional(s) with ownership of the firm
    Principal (criminal law), the primary actor in a criminal offense

    Places
    Principal, Cape Verde, a village
    Principal, Ecuador, a parish in Azuay Province

    Other uses
    Principal (computer security), an entity that can be identified and verified
    Principal (finance), the face value of a bond
    Principal sum, the original amount of a debt or investment on which interest is calculated
    Principal or principal officer, the senior management level in Her Majesty's Civil Service, UK
    Principal or Diapason, an organ stop on a pipe organ
    Principal, the lead musician in a section of an orchestra
    Principal Financial Group, a life insurance company traded on the NYSE
    The Principal, a 1987 action film

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