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Email this2:06 pm
January 10, 2017
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Situation: Husband and wife jointly (50/50) own a house for many years. A portion of the house is used for rental purposes for all years owned. The husband declared all rental income for all years owned. The wife passes away leaving a Will which leaves the house to the husband.
Believe there are 2 options from a tax perspective.
Option 1: The wife's 2022 final tax return does not include any capital gain for the property as the home passed to the husband through the will. Husband will pay the entire rental portion of the Capital Gain (CG) tax when the house is sold or inherited.
Option 2: The property fair market value (FMV) is determined on or about the date the wife deceased. The wife's final tax return can claim a "deemed disposition" of "up to" 50% of the FMV of the rental portion of the Capital Gain. The husband will pay the remaining CG when the house is sold or inherited. The idea is to reduce CG tax payable by by aiming to be in lower tax brackets for both spouses.
Question: Can the deceased spouse's final return claim a "deemed disposition" of "up to" 50% of the rental CG or must it be exactly 50% of the rental CG? Does the province one lives in make a difference? Are there any other pitfalls to consider?
5:59 pm
September 11, 2013
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Lodown, this is a high interest savings account site, not really the appropriate venue, I wouldn't suggest relying on info received here regarding the income tax implications of a spouse's death on a jointly owned property used partly for personal use (it appears) and partly for rental activities, especially as your scenario may lack specific details needed for a conclusive answer (e.g. whether or not there is a capital gain at all might depend on whether or not CCA was previously claimed, and so on).
Canada site has lots of info for you, google will help. You can start with the relevant sections in CRA Guide T4036, Rental Income. Also you could consult a professional (tax accountant, lawyer) for assistance.
2:27 pm
August 5, 2022
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I'm in somewhat of a similar situation with regards to 'deemed disposition.'
I rented top floor of my bungalow(50% rental) with my brother on a 50/50 ownership. Last year tenants moved out and we decided not to rent anymore, hence 'deemed disposition.'
In your example if they had 50/50 ownership, rental income should have been reported according to their share of ownership as I understand it. Any capital gain on the rental portion should be split according to percentage of ownership as well(in this case 50%).
It gets a little involved however as there are elections 45(2) and 45(3) that one can make. Also if the rental portion was just a small area of the total property then deemed disposition would not apply as long as no Capital Cost Allowance or structural alterations were done. In your example and my case this would not apply as it was 50% rental.
As Bill mentioned T4036 Rental Income and also T4037 Capital Gains guides go into change of use deemed dispositions. You could call Revenue Canada to mail them or download them from their site.
I contacted a couple of tax preparers who said I don't have to report anything which isn't what the guides state. I contacted Revenue Canada
(4 difference times, 4 different people- one didn't know how to answer and hung up)where they contradicted each other. In my case the last Revenue Canada agent said the following:
I have a deemed disposition where I complete page 2 of schedule 3(line 17900-Box 1) and page one of T2091(IND). When I actually sell the property I split the selling price between the rental portion I rented(50%) and principal residence . I report any capital gain on rental portion and again designate the rest as my principal residence by completing schedule 3 and Form T2091. Similar to what's in the guides.
I know it's a high interest savings site, but I like investment ideas or how to handle situations based on experience of others. That's how I continue to learn different strategies.
11:44 am
January 10, 2017
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Thanks for the reply Jimmy. Regarding my question, it seems a "deemed disposition " for the deceased spouse must be the actual FMV % owned (in this case 50%) and not "up to" the 50% of the FMV owned. I do not put much stock in what CRA reps say as you found out which is why we use these forums to share real life experiences and knowledge. The other advice I can give you is do get a real-estate agent or appraiser to give you a written assessment of the FMV as backup for your CG calculation. Also, any "Capital Expenses" will increase your Adjusted Cost Base and thereby lower your taxable CG.
11:52 am
January 10, 2017
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Bill said
Lodown, this is a high interest savings account site, not really the appropriate venue.
Maybe Peter would like to add to the site? After all, it is a major General topic we all deal with and the right moves taxwise can make one better off than merely chasing interest rates.
7:18 am
August 5, 2022
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It turns out the advice I was given by the tax preparers was right. I don't have to report anything about deemed disposition on my tax return until I actually sell the property.
I called Revenue Canada and spoke with them again. I really had a knowledgeable person who bounced my scenario off another 'resource officer.' In the end they advised me to report nothing until I actually sell the property. When I sell the property I should make an election under 45(3) which allows me to claim an additional 4 years as principal residence(so instead of reporting any capital gain from 2012-2022 when the top floor was rented I only have to report the capital gain from 2012-2018). The agent was really thorough and said it was more advantageous for me to use election 45(3) than the option mentioned in my previous post. As always it is best to consult a variety of sources for the best scenario.
8:33 am
September 11, 2013
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Whenever I call CRA and get an unhelpful agent I just hang up and try again. I've never had to call more than 3 or 4 times to get an agent who is very helpful.
10:17 am
January 10, 2017
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How does one know the CRA agent knows what they are talking about?
10:57 am
January 10, 2017
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Jimmy said
It turns out the advice I was given by the tax preparers was right. I don't have to report anything about deemed disposition on my tax return until I actually sell the property.I called Revenue Canada and spoke with them again. I really had a knowledgeable person who bounced my scenario off another 'resource officer.' In the end they advised me to report nothing until I actually sell the property. When I sell the property I should make an election under 45(3) which allows me to claim an additional 4 years as principal residence(so instead of reporting any capital gain from 2012-2022 when the top floor was rented I only have to report the capital gain from 2012-2018). The agent was really thorough and said it was more advantageous for me to use election 45(3) than the option mentioned in my previous post. As always it is best to consult a variety of sources for the best scenario.
Careful, throughout the period of the top floor being rented did you have a principle residence? If so, 45(3) cannot be used as a family can only have 1 principle residence in any given year. If the bottom floor was your principle residence and it is connected internally to the upstairs then you do not need to file 45(3) at all, because you are simply reclaiming space in your principle residence.
11:17 am
September 11, 2013
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Lodown, I can't give you any specific tips, just like in life in general it's pretty easy to suss out if someone knows what they're talking about. With CRA, as I've got a good grasp of the basics of tax and thus my questions are more complex usually it's pretty easy to figure out if the agent is trying to get rid of me because they don't like the complexity vs those agents who actually like something that's more interesting than the run of the mill questions. I've been doing it for years, maybe I've just got a feel for their agents by now.
11:46 am
August 5, 2022
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Lodown said
Careful, throughout the period of the top floor being rented did you have a principle residence? If so, 45(3) cannot be used as a family can only have 1 principle residence in any given year. If the bottom floor was your principle residence and it is connected internally to the upstairs then you do not need to file 45(3) at all, because you are simply reclaiming space in your principle residence.
We have the basement as our principal residence throughout all the time the top floor was rented.
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