Matt C. Altro is a regular contributor to Paul Delean’s business column in the Montreal Gazette. Click here to view the article online or scroll down to read Matt’s answer to the second question below.
Tax Strategy: Keep taxman apprised when converting a home into a rental
PAUL DELEAN
The Montreal Gazette
Monday, May 4, 2015
The required paperwork when converting a condo to rental use and the implications of a split pension in Canada on a U.S. tax return were among the topics raised in the latest batch of reader questions. Here’s what they wanted to know.
Q: “I currently own a condo and will be renting it as of this summer as I’ve just purchased a house. Who would be best suited to evaluate the value of the condo so that, when I do want to sell in a few years, I pay less capital gains? And what legal document would be needed as proof for future tax reasons?”
A: Converting a condo from principal residence to a rental unit constitutes a change of usage in the eyes of the taxman, the equivalent of having sold it and reacquired it at current market value. “The ideal evidence of value is for the reader to contact a real-estate appraiser who can provide an evaluation report on what the condo is worth,” said Nick Moraitis, partner at accounting firm Fuller Landau. The reader would then use the suggested value to report the “sale” on his or her tax return and claim the principal residence exemption on any appreciation (thereby avoiding tax). Don’t skip it just because there’s no tax triggered. “Failing to (report it) could risk losing the exemption,” Moraitis noted. Because of the exemption, only increases in value from the time you change use would be taxable. If tax authorities question the numbers, you have the appraisal report in your files. “Some may say that you can use municipal evaluation to establish the value, but in most instances the tax authorities would challenge that value since the municipal valuations may not represent true market value today,” he said. For those changing the usage of their home only temporarily (for instance, for a work-related relocation), Moraitis notes that you can file an election with your tax return showing the change of use so you won’t be considered to have actually sold the property. This is often what people do when they move away for a couple of years; it allows them to preserve principal-residence status on the property for another four years, without actually occupying it.
Q: “My father, 65, has higher income than my mother, who is a U.S. citizen as well. If I split their pension income on my Canadian taxes, does she have to declare split pension on her U.S. return, which may cause her to owe in the U.S.?”
A: Tax expert Matt Altro of MCA Cross Border Advisors Inc. says she doesn’t have to include his income if she submits her U.S. return under IRS status “married filing separately.”
Q: “My mother has inherited a property in Latvia with her two siblings. She’s going to sell them her third (for less than $100,000). Will it be taxable in Canada and how and where does she declare it here for tax purposes?”
A: Inheritances aren’t taxable. Your mother is considered to have inherited her share of the property in Latvia at fair market value. Any increase in value from that point to the actual sale date would be taxable in Canada in the year of sale under the terms of the tax convention with Latvia. You’d declare the capital gain on both federal and provincial tax returns.
The Montreal Gazette invites reader questions on tax, investment and personal-finance matters. If you have a query you’d like addressed, please send it to Paul Delean, Montreal Gazette Business Section, Suite 200, 1010 Ste. Catherine St. W., Montreal, QC, H3B 5L1, or by email to pdelean@montrealgazette.com