[Rich Aknk]

I have a client who rents out 75% of his personal residence and lives in the other 25%. He's been reporting the rental income and related expenses annually for years. When it comes time to sell his residence, is it possible that CRA will deny the full 100% personal residence exemption as 75% has been used, over the years, as rental.Or will they even consider this? No CCA has ever been claimed.

[tmanery]

I had a similar situation and the CRA ruling was that the client lost the Personal Residence exemption. In further discussions with CRA I was informed they start looking after 40%.

[dunner]

At some point the rental of the house becomes more than incidental rental use. I would tend to think that where the rental portion is greater than 50% then you must pro-rate your principal residence exemption to reflect the non-personal use of your house. I would check to see if there are any related tax cases if I were you.

[Easter1]

dunner, on 26 January 2012 - 01:39 PM, said:

At some point the rental of the house becomes more than incidental rental use. I would tend to think that where the rental portion is greater than 50% then you must pro-rate your principal residence exemption to reflect the non-personal use of your house. I would check to see if there are any related tax cases if I were you.

Dunner,

I wish the number was 50%, it is closer to 15%, audited tested unfortunately. The way around is not to claim any rental income in the year prior to disposition.

Easter

[spenceh]

Easter1, on 29 January 2012 - 08:42 PM, said:

Dunner,

I wish the number was 50%, it is closer to 15%, audited tested unfortunately. The way around is not to claim any rental income in the year prior to disposition.

Easter

Which , of course, means not having rental income that year. :lol:

[Simple Shingle]

Any change in use issues when you stop having that rental income in the year prior to disposal??

Seems to me there are, perhaps not with 15% rental use, but certainly with more than 50%

[Easter1]

Simple Shingle, on 30 January 2012 - 07:17 AM, said:

Any change in use issues when you stop having that rental income in the year prior to disposal??

Seems to me there are, perhaps not with 15% rental use, but certainly with more than 50%

No rental income does necessarily mean a change of use, no rental income means a choice was made for that given period not to rent the property, ie vacant possession necessary to complete a real estate sale etc.....

Too many field audits start at the land titles office, BE CAREFUL!!!!!

This post has been edited by Easter1: 30 January 2012 - 11:41 PM

[Simple Shingle]

Happy to take your word for it Easter, as I have not done the case law research.

Just seemed to me that, that under the ITA rules, if you had a property that was primarily a rental, where you lived in say 40% of the house, (and it appears from the above posting by Tmanery that CRA is concerned with 60% personal and 40% rental) that when it becomes a principal residence, (which I believe you implied when you said the answer to avoiding the capital gain\proration of the exemption) was to not earn rental income) you have a deemed disposition of the rental property.

If you have this property not earning rental income for a year in order to prepare it for a sale, hence you do not earn rental income for a year, then sell it, I would think you are still selling a property that was used last to earn rental income, hence subject to capital gains treatment.

If, as noted by the poster, that if you have taken CCA on that part of your principal residence that earned rental income, then you are definitely in capital gains territory.

Interesting question and situation.

[Easter1]

Simple Shingle, on 31 January 2012 - 06:18 AM, said:

Happy to take your word for it Easter, as I have not done the case law research.

Just seemed to me that, that under the ITA rules, if you had a property that was primarily a rental, where you lived in say 40% of the house, (and it appears from the above posting by Tmanery that CRA is concerned with 60% personal and 40% rental) that when it becomes a principal residence, (which I believe you implied when you said the answer to avoiding the capital gain\proration of the exemption) was to not earn rental income) you have a deemed disposition of the rental property.

If you have this property not earning rental income for a year in order to prepare it for a sale, hence you do not earn rental income for a year, then sell it, I would think you are still selling a property that was used last to earn rental income, hence subject to capital gains treatment.

If, as noted by the poster, that if you have taken CCA on that part of your principal residence that earned rental income, then you are definitely in capital gains territory.

Interesting question and situation.

Simple Shingle,

Before this discussion goes much further, the act does not allow for any expenses to be deducted against rental income on a principle residence with mixed use. 100% of the rental income is to be claimed per the act. The 15% or 40% rules are all subjective and relative.

Easter

[Simple Shingle]

That would preclude CCA on that portion. I only had a mixed use of a B&B in my experience, never a mixed use rental, so I guess I spoke out of turn on the CCA, not realizing you could not even claim it in the first place.

[Simple Shingle]

Just for clarity, I'm assuming you meant CCA, not "any" expenses

You can claim the reasonable expenses of a mixed use property against the rental income, so that, for example, if you rent out 40% of your principal residence, you can certainly claim 40% of the expenses and 100% of the expenses you can specifically attribute to the rented space.

I know this is not "the act", but it is clearly spelled out in the guide.

http://www.cra-arc.g...6/t4036-11e.pdf

[Easter1]

Simple Shingle, on 31 January 2012 - 06:15 PM, said:

Just for clarity, I'm assuming you meant CCA, not "any" expenses

You can claim the reasonable expenses of a mixed use property against the rental income, so that, for example, if you rent out 40% of your principal residence, you can certainly claim 40% of the expenses and 100% of the expenses you can specifically attribute to the rented space.

I know this is not "the act", but it is clearly spelled out in the guide.

http://www.cra-arc.g...6/t4036-11e.pdf

The guide vs the act, what holds wait in responding to the proposal letter!!!

[Simple Shingle]

Of course the act, regulations and case law rule and the guide, IT Bulletins etc carry no weight.

So are you saying the guide is wrong here and that you actually meant it when you said there are no expenses AT ALL deductible (not just CCA) if you rent out part of your house??

If so, by all means, act accordingly with your clients, and I'll deduct them for mine.

No need for a response.

[Easter1]

Well, you have me there, once every couple of years I step out of line and realize why I don't often comment on tax issues.

Good luck to you this season, but be extremely careful you don't push the wrong button along the way.

I have made a career out of correcting the errors of 'button pushers' please carry on.

Easter

NB Why would you ever jeopardize your capital gains exemption by claiming CCA????? :rolleyes:

[Simple Shingle]

I suppose that if you lose your principal residence exemption anyway on the presumably significant rental portion of your principal residence, you might as well take it.

Otherwise I'm with you. Makes no sense when the rental is only a small portion of the house

BTW, I still think there is a change in use issue with the 75% rental use that a year of not earning rental income won't solve.

No amount of button pushing or hiding it from the tax man for a year will make that go away.

[spenceh]

Easter1, on 01 February 2012 - 02:24 PM, said:

Well, you have me there, once every couple of years I step out of line and realize why I don't often comment on tax issues.

Good luck to you this season, but be extremely careful you don't push the wrong button along the way.

I have made a career out of correcting the errors of 'button pushers' please carry on.

Easter

NB Why would you ever jeopardize your capital gains exemption by claiming CCA????? :rolleyes:

When you are an H & R Block franchise which 'guarantees the best bottom line.'

The pennies saved with CCA are nothing when you have to deal with recaptured CCA AND capital gains when you sell.

I hate when I get a client who was previosuly with H & R Block and 'benefited' from the CCA deduction on their principal residence.