Sun
Q: We currently have a rental condo for which we report income and expenses every year. We also live in our own home. In the future, if we sold our home and moved into the condo, would we be able to circumvent paying capital gains on the condo if we lived in it for a year or so, then sold it?
– Grace Kravac,
West Vancouver
Chartered accountant Blair East, of Vancouver‘s Manning Elliott, answers:
Unfortunately, simply living in your condo for a year will not eliminate paying some income tax on a capital gain on the sale of your rental condo.
You are deemed to dispose of your rental condo for proceeds equal to its fair market value at the time you convert it to your principal residence. Any appreciation in the condo’s value since its purchase will result in a capital gain subject to income tax.
An election may be made to defer the capital gain on conversion until you actually sell the condo. This election would be filed with your return for the year in which you sell the condo.
However, this election cannot be made if you have previously deducted capital cost allowance in respect of the property. Where CCA has been deducted, you may also be taxed on any recovery of previous CCA deductions in addition to the capital gain.
Once you start living in the condo you may be able to use the principal residence exemption to reduce the capital gain on a future appreciation in the condo’s value that will be subject to income tax.
The principal residence exemption is determined by multiplying the capital gain on sale by the proportion of one plus the number of years the property is designated as your principal residence divided by the total number of years the property was owned. An important consideration is that only one property may be designated as your principal residence for any given year.
If you made a capital gain election in respect of the condo in your 1994 tax return (the last year an individual taxpayer could elect in their tax return to claim their unused basic $100,000 capital gain exemption, before it expired) this election will also reduce the tax payable on a future sale of the condo.
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Q: In 2002 I purchased a U.S. guaranteed investment certificate. The subsequent rise in the Canadian dollar meant my exchange-rate losses wiped out any interest gains. How does that affect taxation when the GIC multi-year term has ended, acknowledging that annual interest earnings must be declared. If an investment has lost all or part of the interest earnings over that extended period, can a loss be declared against future interest income. A capital loss allowance would not be of value if it could only be applied against capital gains since I only have interest income.
– David Colley,
Vancouver
Chartered accountant Mark Hoag, of Vancouver’s Nordahl Craig Cummings and Gares, answers:
Capital losses cannot be applied against interest income, as the two sources of income are treated differently for tax purposes. Interest income is fully taxable, whereas only 50 per cent of capital gains are taxable.
Any foreign interest income earned is to be reported annually on your Canadian tax return after it is converted to Canadian dollars using the annual average foreign exchange rate prescribed by the Canada Revenue Agency.
Any difference between what you pay for an investment and what you receive on the sale or redemption of the investment is considered a capital gain or loss. This includes any gain or loss in the value of the investment due to fluctuations in the foreign exchange rate. Any annual fluctuation in the value of the investment does not affect income taxes because gains or losses for tax purposes are only recognized when the investment is disposed of.
Though any capital loss arising from the sale of the investment cannot be applied against the interest income, the loss can be applied against any capital gains which may have arisen on the sale of other investments in the current year or in future years.- – -Send your money questions with your name, address and a daytime telephone number to Michael Kane at [email protected], or fax 604-605-2320, or c/o The Vancouver Sun, 200 Granville St., Suite 1, Vancouver, B.C., V6C 3N3.
© The Vancouver Sun 2005
