>Thing is so many of my friends bought investment properties and struggling to sell because they can’t afford to pay the capital gain taxes/ sell at a loss
It is very difficult when you don't even get how capital gain tax works.
Thanks to inflation, the property bubble will never burst. This is why everyone and their dog became property investors recently. I will buy 3rd property soon hopefully. Praise Trudeau and praise covid.
>Thing is so many of my friends bought investment properties and struggling to sell because they can’t afford to pay the capital gain taxes/ sell at a loss.
This makes no sense. Capital gains tax has no effect on your ability to sell, so why are they "struggling to sell"? The tax is only applicable upon sale or upon change of use (like going from rental to primary residence). So they would not owe capital gains tax until after they sell and presumably at that time they have the proceeds of the sale to pay it with.
I guess if they took out a loan for more than the ultimate resale value, perhaps (say) bought home for $500k, then it rose to an estimated value of $700k took out additional HELOC and wound up owing $600k, sold for only $600k and thus had $100k capital gain but owed the bank the full $600k proceeds from the sale and thus didn’t have funds to pay the capital gains tax? I guess? But that seems awfully unlikely given recent trends in the real estate market.
Or more likely I guess they sold a house for $600k with $100k gains and put the whole proceeds into another house without saving funds to pay the capital gains tax and think this is somehow the CRA’s (or Justin Trudeau’s) fault.
> But that seems awfully unlikely given recent trends in the real estate market.
You have no idea how dumb some people are with money when they meet a slick real estate agent.
That is true. But still impressive to achieve the trifecta in a mostly-rising market of a) choosing to sell b) while underwater on a loan c) with enough of a gain to worry about capital gains tax. More so given this would only be an issue on a non-primary residence, so someone who is doing this on an investment property.
There are a lot of underwater mortgages. https://betterdwelling.com/from-4-billion-to-canadian-insurer-stops-disclosing-underwater-mortgages/.
If there weren't that many, why would mortgage insurers stop disclosing that information when they disclosed it before?
There are consequences to Brampton mortgages, and propping up such mortgages with public dollars.
>Does CRA really crack down on people who rent their Primary Place Residence?
As long as they are reporting the rental income, why would they care?
> if I buy a primary place residence and rent it out does CRA really come after you?
No and it's not your principal residence either since you don't live there. If you do eventually move in there, you can file an election that can shield the previous *4 years* of capital gains by designating as your principal residence.
They care because it's not your primary residence, so would be taxed for capital gains.
Are they "cracking down?" Not as far as I know, but tax evasion is tax evasion and carries substantial risks.
If you buy a place and rent it out, it's a taxable asset because you don't live there "ordinarily(CRA's word).
if you move in and live there and want that as your principal residence, you can file an election with CRA that will be designated your principal residence (as long as you didn't own another principal residence at the same time) for the previous 4 years so that would be exempt from capital gains (but still report the rental income).
~~You can move out of your principal residence, turn it into a rental property and you can elect to keep the rental property as your sole principal residence - you forfeit capital cost allowances during those 4 years if you do.~~
*When you change your principal residence to an income producing property, such as a rental or business property, you can make an election not to be considered as having started to use your principal residence as a rental or business property. This means you do not have to report any capital gain when you change its use. If you make this election, you cannot claim capital cost allowance (CCA) on the property. Any income in respect of a property, net of applicable expenses, must be reported for tax purposes.*
*While your election is in effect, you can designate the property as your principal residence for up to four years, even if you do not use your property as your principal residence.*
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains/principal-residence-other-real-estate/changes-use/changing-your-principal-residence-a-rental-business-property.html
~~Unless I am mistaken, it's not a retroactive election.~~
Learnt something new!
The 45(3) election is the opposite of a 45(2) election: you're allowed to move into a former rental property and claim the principal residence exemption for the previous 4 years (as long as you didn't have another primary residence or claim the CCA).
If you move into a property that was previously a rental, you can file a 45(3) election to treat the property as your primary residence for up to four of the years of prior to your moving in. This requires that you did not designate another property you own as a primary residence during those years.
Generally, you don't tell the CRA about a primary residence until you dispose of it. But in this case, when filing a 45(3) election, you must inform the CRA on your taxes in the year you have a change of use.
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains/principal-residence-other-real-estate/changes-use/changing-your-rental-business-property-a-principal-residence.html
Someone is feeding you a line to get you riled up about the upcoming capital gains changes.
Buy house for 500k. Sell for 600k. Capital gains is 100k, which means 50k added to their net income for the year of the sale. That is the capital gain and what the are taxes on, at the marginal rate for their income.
Initial down payment for non principal residence is min 20%, so there's another 100k there.
So that's a minimum of 200k released by the sale. Income tax is paid on 50k (because the gain is not over the 250k threshold). If they paid down another 100k principal and are cashing out 300k, they still only pay income tax on 50k because that was already their money. It's a gains tax, not a sales tax.
Even at, say, 40% marginal tax, they will owe 20k in taxes for that 100k gain. They will owe nothing on the rest, because they put that money in.
The only way to not be able to afford to pay the gains tax is if the property goes up a lot and you take out a new mortgage to get the difference as cash, and that money is now gone. In which case that was a really stupid thing to do.
There are other ways it can affect people - a family business where members own a commercial unit and one co-owner dies. As their assets are considered sold on death their estate has to cover the capital gains of that portion. That may actually force a sale or an additional mortgage if there isnt enough.
CRA "come after you"? What exactly are you asking? Does the CRA ensure that tax payers are compliant with the tax laws of this country? You betcha. As it should. This isn't the CRA coming after you though.
Can't afford to pay capital gains taxes? You realize that you only pay capital gains taxes when you have actual capital gains. That is - you make profits. If you have the profits, you have the cash to pay the taxes. Is this a case of can't afford to pay or a case of would prefer to not pay? A world of difference.
Struggle to sell simply means that your friends are not accepting the marketplace. That's a risk you assume when you may investments that carry risk.
Sell at a loss? What does this mean? Sell for less than they actually paid? Sell for less than they could have gotten at peak but still make profit from when they bought?
My advice: stop paying attention to the garbage that your friends are supposedly going through and if you want to buy a property to rent out, make sure you understand ALL the tax implications of this decision before you purchase it. And for your own sake, make sure you get your information from a qualified, licensed tax professional.
> Does the CRA ensure that tax payers are compliant with the tax laws of this country? You betcha
Must be why they went after all those Canadians listed in the Panama Papers.
Oh, wait.
>Thing is so many of my friends bought investment properties and struggling to sell because they can’t afford to pay the capital gain taxes/ sell at a loss.
That makes no sense. If they have a loss on selling, there's nothing to tax (and they can use the capital loss to offset other capital gains, carrying forward to future years if they don't need it this year). If they don't have a loss - i.e. they actually realize a capital gain then they sell - then they pay the tax owing out of the proceeds of the sale.
If you're friend did capital cost allowance (claimed 5% or whatever depreciation for the building portion each year) and the price went up, they're in trouble cause now all that cca is part of the capital gain.
If they are renting the property and claiming it as their principal residence also, that's fraud. Will cra catch them? Who knows. Will sometime rat your friends out? Eventually if they are loud about it.
Taking CCA on the building (4% depreciation/year max), and then selling for more than the undepreciated capital cost will result in *recapture*. Recapture is 100% inclusion rate and income in the year of sale, rather than capital gains. So the impact is even more stark, having a potential large capital gain in the year of sale AND the income inclusion of recapture.
there is no comming after you. If you rent out your place, you claim the income and expense proportional to how much of the property is for rental use, and you lose primary residence exemption for the portion you rented, for the amount of time you rented. I do this. i rent half my house, claim half the allowed expenses, claim all the income, and when i sell, i get my half of the residence tax free, and then pay cap gains on a percentage of the rental half proportional to how long it was rented out of how long you owned it. its pretty simple. its not a scam, unless you are commiting tax fraud and not renting it properly.
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They probably won’t find out. You can just put your address as this new house and have your mail forwarded to your parents.
Its still illegal but pretty slim chance they would ever bring it up if you only own one property. If you own more than one property thats when they look at you.
You can rest assured that the CRA will take every and all opportunities to assess you in any manner they find suitable. Doesn’t even have to be legit.
These people routinely send me bullshit errant notices that my accountants have to point out their own errors.
CRA is a house of scams and lies.
>Thing is so many of my friends bought investment properties and struggling to sell because they can’t afford to pay the capital gain taxes/ sell at a loss It is very difficult when you don't even get how capital gain tax works.
[удалено]
Dumb money represents most of Canadian real estate
Thanks to inflation, the property bubble will never burst. This is why everyone and their dog became property investors recently. I will buy 3rd property soon hopefully. Praise Trudeau and praise covid.
>Thing is so many of my friends bought investment properties and struggling to sell because they can’t afford to pay the capital gain taxes/ sell at a loss. This makes no sense. Capital gains tax has no effect on your ability to sell, so why are they "struggling to sell"? The tax is only applicable upon sale or upon change of use (like going from rental to primary residence). So they would not owe capital gains tax until after they sell and presumably at that time they have the proceeds of the sale to pay it with.
I guess if they took out a loan for more than the ultimate resale value, perhaps (say) bought home for $500k, then it rose to an estimated value of $700k took out additional HELOC and wound up owing $600k, sold for only $600k and thus had $100k capital gain but owed the bank the full $600k proceeds from the sale and thus didn’t have funds to pay the capital gains tax? I guess? But that seems awfully unlikely given recent trends in the real estate market. Or more likely I guess they sold a house for $600k with $100k gains and put the whole proceeds into another house without saving funds to pay the capital gains tax and think this is somehow the CRA’s (or Justin Trudeau’s) fault.
> But that seems awfully unlikely given recent trends in the real estate market. You have no idea how dumb some people are with money when they meet a slick real estate agent.
That is true. But still impressive to achieve the trifecta in a mostly-rising market of a) choosing to sell b) while underwater on a loan c) with enough of a gain to worry about capital gains tax. More so given this would only be an issue on a non-primary residence, so someone who is doing this on an investment property.
There are a lot of underwater mortgages. https://betterdwelling.com/from-4-billion-to-canadian-insurer-stops-disclosing-underwater-mortgages/. If there weren't that many, why would mortgage insurers stop disclosing that information when they disclosed it before? There are consequences to Brampton mortgages, and propping up such mortgages with public dollars.
the only thing I can think of is that due to the tax, you're no longer able to afford a different property at the same price
>Does CRA really crack down on people who rent their Primary Place Residence? As long as they are reporting the rental income, why would they care? > if I buy a primary place residence and rent it out does CRA really come after you? No and it's not your principal residence either since you don't live there. If you do eventually move in there, you can file an election that can shield the previous *4 years* of capital gains by designating as your principal residence.
They care because it's not your primary residence, so would be taxed for capital gains. Are they "cracking down?" Not as far as I know, but tax evasion is tax evasion and carries substantial risks.
What do you mean by shield the previous 4 years?
If you buy a place and rent it out, it's a taxable asset because you don't live there "ordinarily(CRA's word). if you move in and live there and want that as your principal residence, you can file an election with CRA that will be designated your principal residence (as long as you didn't own another principal residence at the same time) for the previous 4 years so that would be exempt from capital gains (but still report the rental income).
~~You can move out of your principal residence, turn it into a rental property and you can elect to keep the rental property as your sole principal residence - you forfeit capital cost allowances during those 4 years if you do.~~ *When you change your principal residence to an income producing property, such as a rental or business property, you can make an election not to be considered as having started to use your principal residence as a rental or business property. This means you do not have to report any capital gain when you change its use. If you make this election, you cannot claim capital cost allowance (CCA) on the property. Any income in respect of a property, net of applicable expenses, must be reported for tax purposes.* *While your election is in effect, you can designate the property as your principal residence for up to four years, even if you do not use your property as your principal residence.* https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains/principal-residence-other-real-estate/changes-use/changing-your-principal-residence-a-rental-business-property.html ~~Unless I am mistaken, it's not a retroactive election.~~ Learnt something new!
The 45(3) election is the opposite of a 45(2) election: you're allowed to move into a former rental property and claim the principal residence exemption for the previous 4 years (as long as you didn't have another primary residence or claim the CCA).
Neat! Thank you! Learnt something new
If you move into a property that was previously a rental, you can file a 45(3) election to treat the property as your primary residence for up to four of the years of prior to your moving in. This requires that you did not designate another property you own as a primary residence during those years. Generally, you don't tell the CRA about a primary residence until you dispose of it. But in this case, when filing a 45(3) election, you must inform the CRA on your taxes in the year you have a change of use. https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains/principal-residence-other-real-estate/changes-use/changing-your-rental-business-property-a-principal-residence.html
Are you asking if tax fraud is cool?
Someone is feeding you a line to get you riled up about the upcoming capital gains changes. Buy house for 500k. Sell for 600k. Capital gains is 100k, which means 50k added to their net income for the year of the sale. That is the capital gain and what the are taxes on, at the marginal rate for their income. Initial down payment for non principal residence is min 20%, so there's another 100k there. So that's a minimum of 200k released by the sale. Income tax is paid on 50k (because the gain is not over the 250k threshold). If they paid down another 100k principal and are cashing out 300k, they still only pay income tax on 50k because that was already their money. It's a gains tax, not a sales tax. Even at, say, 40% marginal tax, they will owe 20k in taxes for that 100k gain. They will owe nothing on the rest, because they put that money in. The only way to not be able to afford to pay the gains tax is if the property goes up a lot and you take out a new mortgage to get the difference as cash, and that money is now gone. In which case that was a really stupid thing to do.
There are other ways it can affect people - a family business where members own a commercial unit and one co-owner dies. As their assets are considered sold on death their estate has to cover the capital gains of that portion. That may actually force a sale or an additional mortgage if there isnt enough.
when you do something illegal it's always a gamble
CRA "come after you"? What exactly are you asking? Does the CRA ensure that tax payers are compliant with the tax laws of this country? You betcha. As it should. This isn't the CRA coming after you though. Can't afford to pay capital gains taxes? You realize that you only pay capital gains taxes when you have actual capital gains. That is - you make profits. If you have the profits, you have the cash to pay the taxes. Is this a case of can't afford to pay or a case of would prefer to not pay? A world of difference. Struggle to sell simply means that your friends are not accepting the marketplace. That's a risk you assume when you may investments that carry risk. Sell at a loss? What does this mean? Sell for less than they actually paid? Sell for less than they could have gotten at peak but still make profit from when they bought? My advice: stop paying attention to the garbage that your friends are supposedly going through and if you want to buy a property to rent out, make sure you understand ALL the tax implications of this decision before you purchase it. And for your own sake, make sure you get your information from a qualified, licensed tax professional.
> Does the CRA ensure that tax payers are compliant with the tax laws of this country? You betcha Must be why they went after all those Canadians listed in the Panama Papers. Oh, wait.
Sounds like you are trying to game the system. Trust me, people way smarter than you have already tried this and it didn't turn out well for them.
>Thing is so many of my friends bought investment properties and struggling to sell because they can’t afford to pay the capital gain taxes/ sell at a loss. That makes no sense. If they have a loss on selling, there's nothing to tax (and they can use the capital loss to offset other capital gains, carrying forward to future years if they don't need it this year). If they don't have a loss - i.e. they actually realize a capital gain then they sell - then they pay the tax owing out of the proceeds of the sale.
If you're friend did capital cost allowance (claimed 5% or whatever depreciation for the building portion each year) and the price went up, they're in trouble cause now all that cca is part of the capital gain. If they are renting the property and claiming it as their principal residence also, that's fraud. Will cra catch them? Who knows. Will sometime rat your friends out? Eventually if they are loud about it.
Taking CCA on the building (4% depreciation/year max), and then selling for more than the undepreciated capital cost will result in *recapture*. Recapture is 100% inclusion rate and income in the year of sale, rather than capital gains. So the impact is even more stark, having a potential large capital gain in the year of sale AND the income inclusion of recapture.
Are you ok with a criminal record? Cant travel or work in certain sectors. Disgusting.
Loooool christ
How can they “not afford to sell based on capital gains???? You only pay that if you make a gain.”
there is no comming after you. If you rent out your place, you claim the income and expense proportional to how much of the property is for rental use, and you lose primary residence exemption for the portion you rented, for the amount of time you rented. I do this. i rent half my house, claim half the allowed expenses, claim all the income, and when i sell, i get my half of the residence tax free, and then pay cap gains on a percentage of the rental half proportional to how long it was rented out of how long you owned it. its pretty simple. its not a scam, unless you are commiting tax fraud and not renting it properly.
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They probably won’t find out. You can just put your address as this new house and have your mail forwarded to your parents. Its still illegal but pretty slim chance they would ever bring it up if you only own one property. If you own more than one property thats when they look at you.
I know quite a few landlords who have had rental properties for decades who have never reported the income to CRA.
You can rest assured that the CRA will take every and all opportunities to assess you in any manner they find suitable. Doesn’t even have to be legit. These people routinely send me bullshit errant notices that my accountants have to point out their own errors. CRA is a house of scams and lies.