Court case indicates capital gains tax is due on suites

For those that don’t know and haven’t read the 340 comments on the last post: In general you have to pay capital gains tax on capital property when you sell it.   The “gain” is the difference between the sale price and the purchase price (assuming it went up in value).   For your principal residence, there is a capital gains exemption which means you don’t need to pay capital gains tax.   However, if you are using property to produce revenue (i.e. rentals) then the exemption doesn’t apply and you have to pay capital gains tax again.

The issue under contention is that if you have a suite in your home, you are using part of the home to produce revenue which may trigger paying capital gains tax on the suite portion when you sell the home.   We can safely say that the vast majority of Victoria owners have not historically paid capital gains when selling, but is that just because the CRA didn’t have the data to pursue them?

HHV reader CuriousCat analyzed historical CRA rulings and found a case that is relevant.  CuriousCat is an accountant with 15 years experience and writes the following explanation:


Are basement apartments considered a taxable gain? This Tax Court of Canada case says Yes!

Many people are wondering these days, is my basement apartment considered a taxable gain when I go to sell? These people have been told, over and over by various sources, that as long as you didn’t claim capital cost allowance (CCA) or make structural changes to the property, or that the income was “ancillary” to its use as your principal residence, then they had nothing to worry about. They were told that less than 50% of the house used for rental was “safe”. But was this tested in a court of law? Actually it has.

In the July 16, 2009 Tax Court of Canada case of “Boulet v. The Queen” there are multiple issues being appealed, and the taxpayer was successful in winning all of them, except for the one regarding his principal residence. I believe the only reason the issue even came to light was because of the other issues being argued, and the auditor merely discovered the principal residence problem during the normal examination of his company. This is mainly due to the fact that up until 2016, CRA did not require people to report the sale of their homes; so many instances where people should have paid tax have gone undetected. CRA simply did not have all the information they needed to enforce the law.

Let’s look at the facts of this case. Mr. Boulet built a house on land he purchased from his company. The house had 3 floors including a basement. The basement was set up as an independent one-bedroom apartment with four and a half rooms (including a kitchenette and a bathroom). The basement was accessible from an exterior door and had its own municipal address: 183 Villandry Road. He lived on the two upper floors of the house. Occasionally, his children (who were then 16 and 17 and were in his custody on alternating weekends) used the basement “to watch TV”.  In addition, during his testimony, Mr. Boulet called the basement a guest suite, without actually saying whether it had sometimes been used by his guests.

What is interesting, is that at no time did Mr. Boulet declare any rental income from the apartment, nor was CRA after him to determine if he had failed to report any rental income. As far as this case was concerned, the basement apartment was empty and unused. Yet it still was considered a taxable gain when he sold the house!

In addition, Mr. Boulet testified that he had made no efforts to obtain a separate municipal address for the basement….

  1. I didn’t make efforts to get a separate address. It’s really the town that told me, “Well, you can do that… you can put two addresses.” So, well…okay, I went with that, but I didn’t imagine that this implied that it might possibly mean it was a duplex or something like that.

When he put his house for sale, the MLS listing described the basement as a “bachelor apartment.”  When the house was sold for $330,000 and no capital gain was reported on his 2002 tax return, CRA computed a capital gain upon the sale of the basement based on the fact that the top two floors were 1,800 square feet and the basement apartment was 900 square feet. In this case, the basement apartment was only 33% of the total square footage of the house, below the 50% believed by some people to be the “magic number”.

The decision included the following:

Section 54 of the Act defines “principal residence” as follows:

 “principal residence” of a taxpayer for a taxation year means a particular property that is a housing unit, a leasehold interest in a housing unit or a share of the capital stock of a co-operative housing corporation acquired for the sole purpose of acquiring the right to inhabit a housing unit owned by the corporation and that is owned, whether jointly with another person or otherwise, in the year by the taxpayer, if

(a) where the taxpayer is an individual other than a personal trust, the housing unit was ordinarily inhabited in the year by the taxpayer, by the taxpayer’s spouse or common-law partner or former spouse or common- law partner or by a child of the taxpayer,

Since the Act does not define the word “housing unit”, the judge used two dictionaries:

. . .  2. Premises used for living; a part of a house or building in which someone ordinarily resides.

A unit that provides therein living, sleeping, eating, food preparation and sanitary facilities for one or more persons, with or without essential facilities shared with other housing units.

In this case the basement apartment was considered a separate housing unit. It had 4.5 rooms, including a kitchenette, a bedroom and a bathroom. It was noted the basement was accessible only through an exterior door. The taxpayer had to bring evidence that he ordinarily inhabited not only the two upper floors, but the basement as well. The only evidence supplied by Mr. Boulet in this regard was his testimony that his kids sometimes used the basement to watch TV.

“The evidence clearly shows is that Mr. Boulet did not ordinarily inhabit the basement during the 2002 taxation year. Consequently, Mr. Boulet could not claim the principal residence exemption in respect of the basement of the Residence when the residence was sold in 2002.”

In deciding to apply the gross negligence penalty on the unreported taxable capital gain (which is equal to 100% of the income not reported), the judge took into account the fact that Mr. Boulet built the house so that it would have two separate housing units and sold it on the basis that it had two separate housing units. He found it more probable than not that Mr. Boulet was aware, not only of his duty to report the capital gain from the sale of the house, but also that he was not entitled to the principal residence exemption in respect of the basement, because he never ordinarily inhabited that basement.

“When he was questioned by the Minister about that occupancy, he quite simply tried to get the Minister to believe that he did not report the capital gain because he thought that a taxpayer did not have to report taxable gains from the sale of a residence that he ordinarily inhabited, since that capital gain was exempt in any event.”

Bottom line, the judge believed the taxpayer was trying to avoid paying taxes and intended to omit reporting the sale. The penalty was allowed. In the end, the taxpayer had to include an additional $12,449 to his net income for the year 2002. Assuming his tax rate was 40%, he would have paid an additional $4,980 at the time of filing his taxes. Instead, since this didn’t go to court until 2006 and the appeal wasn’t heard until 2009, there is an additional six years of interest owing on that $4,980 (which amounts to about $3000) PLUS the penalty of $12,449 (plus interest of about $6300). Mr. Boulet’s tax bill is now $26,500 instead of the $4,980 he could have paid.

Now that CRA has changed the reporting requirements, no more feigning ignorance. As this Globe and Mail article states, “The onus is going to be on you to understand the principal residence rules… even if you haven’t sold your residence, you might be deemed to have sold the place in certain situations (if you change all or part of your residence to or from a rental or business operation, as an example), which will require you to report to CRA just the same.”


Huge thanks to CuriousCat for digging this up and translating and analyzing it.    So does this put the issue to bed?  Will you for sure have to pay capital gains on your suite (which makes renting suites in an appreciating market a money losing proposition)?

Mr. Boulet’s suite had a separate address and no internal access, however it seems pretty clear from the judge’s comments that what matters is that the space was not in regular use by the owners and that is definitely the case for our common suites.

Should we still pursue a CRA ruling?

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173 thoughts on “Court case indicates capital gains tax is due on suites

  1. Sweethome you will have to sit down with your insurance company and give them a good description of your home, along the lines I described earlier, they will input the data into an insurance estimator program such as Marshal & Swift and update your insurance.

    Google Marshal & Swift cost calculator.

  2. Sweethome, you’ll have to read your insurance coverage. Some policies are for replacement costs and some are for depreciated costs. And some don’t include for non conforming suites. You have to buy additional bylaw insurance if you have a Triplex that is licensed for three suites but zoned single family. Because if that home is destroyed you can’t build a triplex.

  3. Sweethome, house insurance is not the same as construction cost.

    Insurance costs would also include an allowance for the demolition and removal of the home, cleaning your clothing and appliances, putting your family up in a hotel.

    Usually you would be well covered because rarely is it a total destruction of your home. Most often it is a grease fire in the kitchen. If you’re unlucky to have substantial destruction then you will likely find that you’re under insured. That’s a reason why most insurers will give use a replacement cost well above the cost to build a new home on a ready to build lot. If a new home costs $200 a square to build then they will insure it for $300 a square.

    Never assume that construction costs are the same as insurance costs. I’ve had to add a disclaimer to my reports as I provide a Cost Approach to Value in the reports that these costs are not for insurance purposes and if you use them for that purpose then it’s you’re own fault for being an idiot.

  4. “I haven’t seen any house construction costs around $300 a square foot except for special super energy efficient homes.”

    I certainly hope it’s not $300 a square foot because when I was shopping for home insurance, one estimate was $150 a square foot. That seemed low to me, but what actually is the cost (range) in Victoria? Does anyone have any insurance stories with major damage (e.g. fire) where they found out they were underinsured?

  5. Just Jack:

    You might be right that 300 a foot is a bit high depending on what you build. I always add in the cost of landscaping into my calculations. But the houses I have had built were for my personal use. I also had built in Toronto which has some added cost because the winters are a lot colder. Costs are also probably higher.

    But I think you have accurately put most of the major considerations into play.

    By the way, we popped into an open house on Montgomery (asking just under 1.5 million) were there for half an hour since it was an interesting old house. Nobody at the open house except one real estate agent. One thing I noticed was that there still was a lot of knob and tube wiring in the house. Nice lot but someone did a few cheap renos on it and it felt very old and tired with small rooms. I must be out of touch but frankly I would have trouble paying even a million for it.

    But Markos sales numbers are still strong.

  6. I haven’t seen any house construction costs around $300 a square foot except for special super energy efficient homes.

    Construction costs vary widely between contractors but before you quote a unit in place cost it is necessary to know a lot more about the house you want to build. And one digression before we get too deep into costs. The price per square foot rate or unit in place method is a quick and dirty estimate. A more comprehensive survey showing cost breakdowns by item is vastly superior but this takes time and you should expect to be charged for it.

    How big is it?
    As the size of the home increases the price per square foot rate decreases. A thousand square foot home has a higher price per square foot rate than a two thousand square foot home.

    What style of home?
    A one storey rancher on a slab is usually less expensive than a two storey home on a crawl space.

    What about parking?
    single carport or a detached double garage.

    What about landscaping? Most cost estimates only include rough grading of the site. Landscaping is an extra.

    How about septic systems or drilled wells or a paved driveway (gravel asphalt brick)

    If there is a basement, and if there is how is it finished?
    Unfininshed, finished or a suite.

    How about the quality?
    Is it economy? standard? or custom?

    Any special site preparation work necessary before you build such as blasting or unusual municipal fees or levies? Sidewalks, street lights, sewer upgrades?

    Ideally, you should have deducted these costs from the vacant lot. As you should be paying for a fully serviced lot, at the lot line, that is ready to build. However, when it comes to infill housing within the city it can be a mixture of what is land costs and what is building costs.

    And let’s not forget -GST

    If there is a rebate you might elect to rebate that back to the builder – or not

  7. 3641 Savannah road new listing for 799?. I think it was sold for 720 something in late spring? With propert transfer tax and realtor commission wonder why selling it again?

  8. Michael,

    To get any value from the Zolo stats, you have to look at both the side-by-side charts. In the Toronto chart you can see, on the right, that the mix changed to include more SFH. In the Vancouver chart, you can likewise see that most of the change since Feb. is attributable to a change in mix, but the most recent drop happens with a flat mix. Although this could just indicate that cheaper units are selling better in each of the classes, it may indicate actual price drops.

    Average prices are tricky, but the Zollo data is a bit more detailed than the RBGV chart. You just have to take an extra second or two to look at the mix. You can also scroll down and see a more detailed breakdown.

  9. @ sasqvatch:

    I tend to agree that we have reached a serious point of insanity on house prices. Add the LTT and with building costs around 300 per sq. ft. what do you end up at the end of the day.

    I am not convinced that the mortgage rule changes will have much impact in Fairfield.On the other hand if prices drop dramatically in Vancouver than there could be a serious ripple effect here. On the other hand inventory is extremely low. Have you looked at what they want for a knock down Uplands recently?

  10. Awesome research CC! Makes perfect sense to me.

    I have only read a few comments so far but seems like there is a lot of denial in the air.

  11. @ Bitterbear:

    I hope that in your postdoc if absorbed the fundamental rule of modern economics:– marry rich, it may not make for a perfect or happy marriage but if you persevere then I can guarantee you a wonderful divorce.

  12. Marko: Thank you once again for providing the stats; as always appreciated.

    We seem to be on track to meet the numbers from last year.

    Marko is there any way to divide the stats so that we can see if there is a slowdown in the second half of the month after the new mortgage rules come into effect? Which in turn makes me wonder if there have been a lot of last minute sales to get under the mortgage wire?

  13. Tue Oct 11, 2016:

    Oct Oct
    2016 2015
    Net Unconditional Sales: 244 734
    New Listings: 301 925
    Active Listings: 1,995 3,170

    Please Note

    Left Column: stats so far this month
    Right Column: stats for the entire month from last year

  14. CRA would deal with these tax evaders the way they do with other “cash under the table” industries. They perform a lifestyle audit. And yes, they can ask to see your banking records and if you claim the money is from a friend or family member, they’ll even ask for theirs to verify. They have a lot of tools at their disposal and you aren’t presumed innocent until proven guilty. Its the other way around. Its on you to prove you are innocent.

    For years, CRA has selected certain areas of the tax code to “focus” on. I remember when it was the construction industry because so many people were being paid under the table, they started implementing form T5018. At one point it was “IT contractors”, another time it was donation receipts. And, it is now a matter of fact that if you claim more than $2500 in medical expenses you get an immediate letter from CRA for those documents. I always told people, just because they haven’t focused on this yet, doesn’t mean they are clueless – it’s only a matter of time before it becomes their next audit project. And the more taxes the auditor squeezes from you, the better he looks to HIS boss.

    If you receive a letter from CRA and you have evaded paying taxes, you best see an accountant immediately.
    (Edited to add: see an accountant before you get the letter. We can do a voluntary disclosure and you avoid paying any penalties.)

  15. “A large part of the problem can be laid directly at the feet of the University that seems to have multi-millions for their sports complex but nothing for the proper amount of residences.”

    When I was accepted to grad school at UVic, the acceptance letter came with an itemized list of problems I would experience moving to Victoria. Number three on the list was very few rentals and costly rents at that. I opted to go elsewhere then came here for post-doc. Not much had changed in the interim.

  16. I’m well aware Barrister. The best are the benchmarks, which for Victoria in September were:

    ________MoM__YoY
    Houses 0.9% 19.5%
    Condos 1.7% 20.2%
    THomes 2.2% 20.9%

    Townhomes are currently the leaders.

  17. Ryan Roberts:

    A large part of the problem can be laid directly at the feet of the University that seems to have multi-millions for their sports complex but nothing for the proper amount of residences. Certainly the campus has more than enough vacant land to build these residences.

  18. The really careful tax evaders with suites or room renters insist on cash rental payments, claim they have had bad experiences with checks gone bad, or accept checks and cash them at the bank branch of the renter for cash so no paper trail exists thru their own bank. Of course, they are clever enough to ensure that the cash is not deposited into their own checking account. Nothing like an unexplained deposit of the same amount to a bank account each month or a similar monthly cash payment on a credit card balance. Undoubtedly the well trained CRA auditor can find most of these, but not all. Once likely suite owners are identified with the new reporting, the rest will be relatively easy. I suspect there is a gold mine of revenue here based on my 12 years experience of walking in my hood near a large university where great pride is taken by slimy, tax cheating landlords on how many students can be cramed into a moldy basement or in a house on the edge of being condemned or collapsing at $500 per clip.

  19. Michael:

    Frankly, I often see these “averages that mix condos and houses together. Obviously meaningless statistic. In Victoria you really need to separate the core and the West Shore to get a meaningful feel of what is going on with prices. Even that is a pretty rough number.

  20. Exactly.

    I didn’t call the CRD – I can’t remember who I called but it was District of Saanich or something.

    They said exactly that – they knew that most people have illegal suites and don’t declare the income but they don’t do anything unless there are a few complaints.

    I wasn’t calling to complain just to find out what the deal is. We could have rented out our 1 bedroom suite and made some cool change but we didn’t. Sigh …

  21. “The only thing standing between you and CRA imposing a $50,000 penalty is one disgruntled ex-tenant or one neighbour you pissed-off.”

    I’d say Bearkilla’s odds are quite high of that happening. 😉

  22. On a serious note where does everyone see the market going in the next six months.

    Similar to equities and $CAD. Our 6mths of sideways consolidation should almost be over. However a few segments may be held back with the new rules.

  23. Koffi on Haultin sounds good. Any day except Thursday morning is good for me. Set up a time and date and I will be there marko. Anyone else interested? What are good times and dates for you?

  24. Thanks Marko and Numbers Hack RE: price per sq ft. Very helpful.

    Good to get a rough estimate. I wouldn’t think about building in Vic or Langford. Would rather find an acre or two in or around the Cowichan Valley. I suppose then you have the added cost of a septic field, but hopefully less fees and overall headaches.

  25. By the way Holland has a population of 16 million plus (about half the population of Canada);
    Holland is 42.5 thousand sq. kilometers. Vancouver Island alone is 32.6 thousand sq. kilometers with a population of about 375,000.

    Hate to state the obvious but it is not exactly the same situation. The fact of the matter is that you could lose Holland in Northern BC.

  26. Victoria:

    I called the CRD one day to see if we could rent out our suite….

    Say what? You called the CRD about you home in Saanich for an issue covered by Saanich bylaws?

    Anyhow, doesn’t matter. Saanich is reactive bylaw enforcement. It would take multiple neighbours complaining for them to come investigate. If you complain about a neighbour renting, they won’t do anything until at least one more address complains. And even then…

  27. Maybe we all should get together one day at the Moika house and put some faces to the names.

    Can’t find parking down there anymore so I’ve stopped going. Let’s do Koffi on Haultain.

  28. @LeoM

    There are moments where I wonder if Bearkila is going to end up sharing a federal cell with Bubba.

    Maybe we all should get together one day at the Moika house and put some faces to the names.
    On second thought, considering some of the schemes some of the people might rather stay anonymous.

    On a serious note where does everyone see the market going in the next six months. Will the new changes outweigh the lack of inventory? Are there two separate but overlapping markets in Victoria?

    Happy Thanksgiving by the way.

  29. Why not build a side by side duplex instead? It can create family friendly density at least. The Netherlands is one of the most densely populated countries in the world and it isn’t filled with high rises

    Great idea in theory but in reality 10x easier to get a 15-story building approved downtown than a blanket re-zoning in Fairfield.

    A three lot subdivision in Fairfield is causing chaos -> http://www.timescolonist.com/news/local/in-fairfield-plans-for-small-lot-face-political-scrutiny-1.2361236

    Re Europe I find density in certain cities can be very deceptive. For example, you walk around neighbourhoods in Vienna and sure there are no skyscrapers but you have square blocks of 5 stories buildings with zero offsets. Here we have 15 story building on a square block and a bunch of garbage two story commercial for the remainder of the square block.

  30. I can believe it – it is very corrupt. They told me they only investigate if there is a complain. I was funny – when we first moved into the neighborhood a couple came over to say hello. They came over to welcome us to the neighborhood but also to say we couldn’t rent out our suite. We had a nanny who lived in it and now our 19 -year- old daughter and the previous people had it for their in-laws.

    People in Broadmead are making a lot of dough on illegal suites ….

  31. House in the core with all in for a 3000 sq/ft to 4500 sq/ft house; (permits, drawings, etc…) WITH BASEMENT: $285 to $355 sq/ft
    WITHOUT BASEMENT, you are looking at $250 to $290 sq/ft.

    I tried dropping off a permit application at City of Victoria for a two level home in Fairfield about 10 months ago at $150 per sq/ft and they rejected it. They said minimum they would consider is $180 per sq/ft.

    You could probably do a nice house in Colwood/Langford for around $140 to $150 a foot. City of Victoria pilages you for so many fees and required upgrades (sidewalks, curbs, etc.) that at this point under $200 per sq/ft is pretty much impossible.

  32. I live in Broadmead and suites are not allowed to be rented out. In-laws, help and kids can live in them. On my small street there are at least 5 or 6 illegal suites that have been going on for years. Sure it is all over. I called the CRD one day to see if we could rent out our suite…. They said go ahead – they won’t say anything. I said is it legal – they said no but everyone does it.

    In the past I’ve been in more than one municipality councillor home with a illegal suites. I’ve been in a municipality building inspectors home with two illegal suites and nothing done to code.

  33. Just think of your suite like RRSPs. If you rent it for $1,200/month you basically keep half each year but the other $400/month in CGs you get to offset until you sell 🙂

  34. On an interesting side-note; I went to Mocha House in Cook Street Village for a coffee earlier today and guess what the two couples at the next table were talking about? This blog, and the current Capital Gains discussion. Sounded like they both have suites and they were basically freaking out because they had never considered Capital Gains would apply. Maybe it was Bearkilla because the discussion was about: ‘now what should we do to avoid the tax?’

  35. Bearkilla said: “So to avoid capital gains on a suite you just need to remove the kitchen appliances. Then,…..”

    I think you need to read this page from the Canada Revenue Agency on tax avoidance and tax evasion:
    http://www.cra-arc.gc.ca/gncy/lrt/vvw-eng.html

    The only thing standing between you and CRA imposing a $50,000 penalty is one disgruntled ex-tenant or one neighbour you pissed-off.

  36. Based on your definition they may not be separated though because we use the laundry downstairs and usually go through the suite to do so.

    Re-read your comment – if you are going through their living space to get to the laundry, then I would agree that your suite may be integrated enough.

    Those that built their houses with separate meters, I think that’s an automatic capital gains. That shows your intent.

  37. Sounds like Bearkilla is going to be close buddies with CRA soon being so well versed on how to avoid taxes. I’m sure the hot plate scam won’t fly under the new rules.

    Speaking of the new rules, Ross Kay’s interview on the weekend was interesting saying how few are getting it that this is a 2% plus interest overnight hike and will drive down prices 20% just for starters. Victoria declines should start showing up in November’s numbers as the reality of cutting out half your market sinks in. It’s like 1981 all over again.

  38. Bearkilla:

    I dont think that removing the appliances is not going to help you any if you have been renting the suite. Plus, if they discover that you have intentional sold the appliances separately this would be proof of a guilty mind as far as income tax evasion goes in my opinion.

    The heart of the exemption is what have you actually been using the space for during your ownership. The second question is whether you have converted the space prior to selling it.
    But I am not an expert on this so get some real advise.

  39. So to avoid capital gains on a suite you just need to remove the kitchen appliances. Then, in the ad / deal for the house include them in a second contract unrelated to the sale of the house.

  40. @ Numbers Hack

    Goes a long way to explaining the crazy prices they are asking for a house these days. Not so crazy when you look at the cost of building. I am beginning to feel that I got a bargin three years ago when I bought my house. While the house is ninety years old all the electrical, plumbing were totally upgraded.
    Still it only has single glaze windows and the heating are the old radiators which, truth be told, I actually prefer to electric or forced air. But the furnace is a high efficiency gas so the bills are reasonable since I keep the house cool at night.

    Thanks for the very useful information.

  41. @bman

    House in the core with all in for a 3000 sq/ft to 4500 sq/ft house; (permits, drawings, etc…) WITH BASEMENT: $285 to $355 sq/ft
    WITHOUT BASEMENT, you are looking at $250 to $290 sq/ft.
    It isn’t cheap because materials are in USD generally and labour rates are crazy compared to 2 years ago. IMO, wait another year to build, it is too crazy. Your level of finishing will determine if you are on the lower or higher end.

  42. I live in Broadmead and suites are not allowed to be rented out. In-laws, help and kids can live in them. On my small street there are at least 5 or 6 illegal suites that have been going on for years. Sure it is all over. I called the CRD one day to see if we could rent out our suite…. They said go ahead – they won’t say anything. I said is it legal – they said no but everyone does it.

    Nothing will change….

  43. Retired Guy
    October 9, 2016 at 3:11 pm

    After reading all of the comments here any premium will be for the one without a suite. Sounds as though a suite in your personal residence provides little if anything financially (based on the tax implications highlighted) and just compromises the ability to take advantage of the exemption. No thanks, and that’s without considering the hassle having renters in the basement.

  44. Two new houses are each 3000 square feet in size. One has a 500 square foot rental suite while the other does not. Other than this difference the houses are identical. How much more would you pay for the one with the suite, assuming this house’s value would be greater because of potential rental revenue? And let’s say BC assessment also takes this rental income into consideration and for this reason assesses the house with suite at a higher value. How much more would the assessment or selling price be? Would you be willing to pay $30,000 or $50,000 more because of the suite’s rental revenue? $500,000 for one house and $550,000 for the other? Perhaps this is the sort of difference in value that should be the basis for any future capital gains tax calculation. Base the tax on suite revenue and not on its % of house area. A crazy idea?

  45. Marko, good point that there are many other factors that add to the cost of housing. You bring up the building code as one, and I agree with you. We are trying to build houses, not Swiss watches.

    Anyone know what it costs per sq ft to build a SFD on average now?

    The other thing I think adds needlessly to cost is design, which used to be pretty simple – from the 40s and 50s bungalow, to the 60s and 70s split entry. Houses were functional boxes. This seemed to change in the 80s with so-called “West Coast” architecture, and has persisted, the current preference being for faux Arts and Crafts homes.

    I wonder what it would cost to build a Gordon Head box with an unfinished basement today vs. a Bear Mountain or West Hills special with a needlessly complex roofline, etc.

    Happy Thanksgiving y’all.

  46. Likewise, Happy Thanksgiving everyone. Thank you for all the time and analysis that has been put forth on this topic. As ever, this blog remains a great source of perspective thanks to you all.

  47. Here LeoS, you might find this interesting: https://taxinterpretations.com/cra/severed-letters/2016-0625161c6

    Unless that family member is your child, you may have reason to worry.

    It seems to come down to a few questions:
    1) Does the suite have a separate outdoor access? Yes – go to 2). No – principal residence applies.
    2) Does the suite have a kitchen? Yes – go to 3). No – principal residence may apply, go to 3).
    3) Do you rent it out? Yes – go to 4). No – go to 5).
    4) Is ONE of the persons renting the unit your spouse, ex-spouse/partner or child? Yes – principal residence applies. No – capital gains applies.
    5) Do you, your spouse/partner, ex-spouse/partner or child ordinarily inhabit the space? Yes – principal residence applies. No – capital gains applies.

  48. c) Would the answer be the same if the property was acquired by the child as an intergenerational home as that term is defined by several municipalities (i.e., one street address but with separate interior spaces)?

    Interesting. This is our situation. Suite downstairs with family in it but not charging market rent. Based on your definition they may not be separated though because we use the laundry downstairs and usually go through the suite to do so.

  49. Bob and Suzy aren’t going to sell at a loss as they don’t actually need to sell any of their homes. They are selling when they can pounce on a profit.

    Sure. Houses always go up forever so I’m sure that gravy train will just keep going. After they sell for $6million they should buy for $15M so that they can sell when it hits $35M.

    Bob and Suzy will make out like bandits until the market turns around like it has in Vancouver.

    I’m really not concerned about whether others are making money or not. Your dad is a builder, why not do what bob and suzy are doing and make your millions just by flipping a couple places?

  50. What does CRA use to determine if two units are integrated or separate?

    Integrated:
    not possible to live normally in the living areas of one of the units without also having access to the other unit in order to use its facilities. This will be the case, for example, if one of the units contains all the bedrooms while the other unit contains the kitchen and the bathroom, and the two units are jointly used for residential purposes as a single unit.

    Separate:
    each unit of a duplex can be ordinarily inhabited without significant renovation and without access to the other unit being provided to the occupant (for example, if each unit has a kitchen and a bathroom of its own and they both have separate outside access)

    Other factors:
    -the existence of registered title to one or two properties;
    -the existence of a single street address for the building or two separate street addresses;
    -the existence, or not, of separate entrance doors; and
    -the existence or not of separate accounts for public services.

  51. Here is the most recent document from CRA regarding principal residence exemptions and duplex:
    https://taxinterpretations.com/cra/severed-letters/2016-0625141c6

    Questions:
    1)Whether, for the purposes of the principal residence exemption in
    paragraph 40(2)(b), the two units of a duplex can be considered as one
    “principal residence” as defined in section 54, in a situation where the
    owner occupies one unit while her aging parent occupies the other?
    2) Is the fact that an internal access has been added between the two
    units and that the owner and her parent share most of their meals in the
    same unit a sufficient indication that the two units are one “principal
    residence”?

    Position Taken: 1) Likely not. 2) No.

    Reasons: 1) and 2): Prior positions. Each unit appears to be one housing unit for the purposes of the principal residence exemption.

    c) Would the answer be the same if the property was acquired by the child as an intergenerational home as that term is defined by several municipalities (i.e., one street address but with separate interior spaces)?

    CRA response to question c)
    Our comments would essentially be the same if the property acquired by the child was an intergenerational home rather than a duplex. In this regard, note that a detailed description of the characteristics of a particular given building would be required in order for us to be able to provide more specific comments. The fact that the building has a single street address would be one of the factors that could be considered in accordance with what is set out above. However, this alone could not, by itself, be determinative.

  52. Here is a summary of all cases, technical interpretations, articles and other relating to section 54 of the Income Tax Act which deals with “principal Residence”.
    https://taxinterpretations.com/tax-topics/income-tax-act/section-54/principal-residence

    I have already summarized Boulet vs. The Queen .

    Another old case, The Queen v. Mitosinka, 78 DTC 6432, [1978] CTC 664 (FCTD)

    The taxpayer rented out 1/2 of an unusual structure which was analogous to a duplex but which had a common basement and a window connecting the adjoining kitchens. In light of the facts that the building “could, and did, house separate families, who had separate facilities, and paid for separate services,” only 1/2 of the building was held to be the “housing unit” of the taxpayer. The Minister’s allocation of 1/2 of the underlying land to the taxpayer’s principal residence was not shown to be unreasonable.

    @Barrister these three cases support your facts that the carriage house on your property is eligible for the PRE:
    Williams v. Merrylees, [1987] BTC 393 (HCJ.)

    A lodge on a four acre estate that was located about 200 metres from the main house and was occupied by a gardener employed by the taxpayer was held to be part of his residence.

    Markey v. Sanders, [1987] BTC 176 (HCJ.)

    In order for two buildings to be regarded as one residence, the occupation of the second building must increase the taxpayer’s enjoyment of the main building, and the second building must be regarded as being very closely adjacent to the main building. The second test was not satisfied with respect to a three-bedroom servant’s house which was “sited well over an acre’s worth of land away from the main residence and separated from it by a paddock”.

    Batey v. Wakefield, [1981] T.R. 251, [1982] 1 All E.R. 61 (C.A.)

    S.29(1) of the Finance Act 1965 exempted an individual from capital gains tax on the disposition of “a dwelling house which is … his own or main residence”. A family occupied an 8-room house in the country on the weekends, and a caretaker-gardener, who lived with his family in a chalet-bungalow on the grounds that was separated from the main house “by about the width of a tennis court and a yew hedge”, took care of the premises during the week.

    It was held that the exemption was available. “[I]n the ordinary use of English, a dwelling house, or a residence, can comprise several dwellings which are not physically joined at all. For example, one would normally regard a dwelling-house as including a separate garage.” Although the bungalow provided separate accommodation to the caretaker’s family, its purpose was to assist in servicing the main building.

    *To prevent this comment from getting even longer, I will continue my thoughts in another.

  53. @ Barrister I am envisioning a more European model certainly not an American one. One of the things that makes Victoria great is our downtown was created before the era of the car. It’s very walkable. It should be surrounded by the European stile density I describe which was not high rises full of micro lofts. (Although they have their place). All development will make developers profit or it won’t happen so we can probably exclude that from the equation. Since you mentioned Fairfield, there is maybe 10% of the homes there that are single family. I am saying we call a spade a spade and allow a better development style. Every new house built in these neighbourhoods has a suite in it. Why not build a side by side duplex instead? It can create family friendly density at least. The Netherlands is one of the most densely populated countries in the world and it isn’t filled with high rises…. We agree that we need villages connected with good transport but also with wild nature in between…. Density can help preserve our natural assets.

  54. I think we would be wise to examine the Swiss model of cluster villages and cities. Let me leave you with one more thought.

    I once drove with a friend from Zurich (northern Switzerland) to Milan (Italy) and it was less than 300km. It’s a totally different ballgame.

  55. Why does everybody immediately assume that high density is the solution? The two cities in Canada that have really done high density are Toronto and Vancouver. Neither are particularly livable or affordable.

    The majority of people in Victoria are anti-development and argue against density but there is never an alternative provided. If a large building downtown houses 300 people where do you physically put those people 300?

    You would literally have to mandate a zero population growth policy and then people would complain how we don’t have any new doctors taking over for those retiring, etc.

  56. Marko, before you pull out that kitchen, might want to also pull all those YouTube clips of you building the house!

    Not going to pull the kitchen. It’s a 20 year house for me and I am betting on the housing problems to be a topic for the next 20 years. In the next 20 years either the government relaxes the suit CGs rules or they introduce max PR exemption. I don’t think they’ll have enough for pensions in 20 years let alone funds for affordable housing of any sort.

    Not confident that problems will be solved with dedicated rental housing either.

  57. So what? Bob and Suzy are speculating on luxury real estate. Sometimes that pays off, like in your examples, and sometimes it doesn’t. Maybe afterwards they buy a property for $8 million and can only sell it for $5 million a few years later. That’s how it goes.

    There are few other details buried in my story I should have made clearer. For example, Bob is a developer and he builds condos and townhomes for profit. He is using the principal residence exemption to run a part of his business. The $3 million dollar house he builds in the Uplands is actually worth $3.6 on completion alone as building is how he makes money in his day to day job.

    Bob and Suzy aren’t going to sell at a loss as they don’t actually need to sell any of their homes. They are selling when they can pounce on a profit.

  58. Your tax bill @ 47.7% marginal rate = $20,701

    Their tax bill @ 38.29% marginal rate = $19,145

    So I pay the same tax even though I made more money on a large asset? It’s like Tom and Sue buy a Civic, I buy a Lexus and we pay the same tax (in absolute terms). We ignore that Tom and Sue paid 20% on the Civic and I paid 10% on the Lexus.

  59. If all the future Toms and Sues stopped renting their basements, houses would be that much cheaper, and there would be that much more demand for construction of dedicated rental housing. Everyone would come out ahead.

    There are many other reasons not often discussed on the blog as to why prices have gone up. You have the obvious ones of interest rates and suite but there are also other large factors.

    Limited developable land. This especially applies to Victoria and Vancouver. Just think of the ease of developing Gordon Head in the 1970s. It’s all flat, compare with blasting apart Bear Mountain.

    B.C. building code has added a ton of cost to building a new home. Even from the last building code (my personal house) to the current building code (residential project I am involved in Fairfield) has been brutal for cost.

    Muncipalities have gone absolutely nuts in terms of their requirements and approval times, adding to the cost.

    On top of all the existing redtape the HPO office comes out this summer with the most idiotic piece of red tape I’ve ever come across -> https://www.youtube.com/watch?v=VcfyZHdfS5s

    Etc., etc. In conclusion I don’t think you throw out suites and prices drop dramatically. Even if we assume the price of a home drops by the additional mortgage qualification weight of a suite a house in Victoria would drop from $750k to $670k. Still not affordable.

    Regarding more demand for dedicated rental housing not sure how that exactly works unless rents go up. 90% of dedicated rental housing in Victoria was built from 1950 to 1980. There is a 20 year gap between 1980 and 2000 where suites weren’t huge but dedicated rentals weren’t built. You can blame the post 2000 on suites.

  60. Dasmo:

    Why does everybody immediately assume that high density is the solution? The two cities in Canada that have really done high density are Toronto and Vancouver. Neither are particularly livable or affordable.

    The definition of insanity is repeatedly doing the same thing and magically thinking that you will get a different result.

    What every study does show is that high density cities make the developers very rich. The highest economic efficiency, affordability and quality of life is found in cities of 200,000 to 300,000. That may seem counter intuitive but every serious study on cities has come up with the same result.

    Actually, the most efficient model is when you have a cluster of small cities that are linked with good transportation but geographically separated by greenbelt.

    We certainly could raze all in the houses in James Bay and Fairfield and Fernwood and simply build twenty to thirty story highrises; Vancouver and Toronto followed that path. I am sure the developers would be thrilled but would that produce either affordability or quality of life?

    I am old and I dont have a dog in this fight since I wont be around to see the final results. I do worry about the next generation. But, I have listened to developers make the same type of arguments successfully over the years and then I watched while the same results turned out every time. It seems to be that we are almost unable to learn from past mistakes.

    Rather then following the American model of high density development, I think we would be wise to
    examine the Swiss model of cluster villages and cities. Let me leave you with one more thought. When the politicians and the spin doctors for the developers are both reading from the same script
    what should that tell you?

  61. Curious Cat:

    Can you explain the difference to me between so called affordable housing and subsidized housing.

  62. The only thing new is reporting. They didn’t change or add any taxes. If you build a duplex and live in one half and sell the duplex of course you will pay CG. Doesn’t matter if you call it a TV room. He built a duplex….
    This will hopefully stop the building style of up/down duplexes that are single owned with the lower unit half underground. Better we create density and affordability with row houses and side by side duplexes and apartment/row house hybrids then more expensive houses with basement suites (AKA up down duplexes)

  63. Regarding CCA, because real estate tends to increase in value, it’s not a good idea to claim it. First of all the rate sucks, only 4% per year for class 1 asset, which all buildings fall into, and the year of addition this is further reduced under the 50% rule. Second of all, you can’t use CCA to create a rental loss. Third of all, when you sell you will have a recapture of CCA which gets added to your income at 100%, and then if you sell for more than the ACB, you still have a capital gain. Let’s break it down with some pretend numbers, shall we?

    In 2014 you purchase a house for $500,000. The land is worth $300k and the “improvements” are worth $200k. You immediately rent out the basement which is 50% of the house. You decide to take CCA. You fill out the CCA section of the rental statement by reporting $100,000 ($200,000×50%) as Class 1 under additions. There is a first-year rule for CCA that only allows you to deduct 50% so actually CCA expense for 2014 is 100,000×4%x50%=$2000. Now you can only use this IF you have rental income of more than $2000. So if your net rental income is $2500, this will bring it down to $500. If your net rental income is $1000 then you can only deduct $1000 to bring it to zero. No loss allowed. (Don’t worry, the software won’t even let you.). For this example, let’s assume it’s the first. In 2015 your starting value for CCA is $98,000×4%= $3920 CCA expense. Let’s assume you have net rental income before CCA of $3000 so that’s the max you are allowed to use. You sell your house in 2016 for $700,000! Wow! Using the same ratio to separate land/building that we used on purchase, 3/5 x $700,000= $420,000 is split as land and $280,000 for building. Suite portion is 50% = $140,000. Damn, that’s more than what my CCA balance is at $95,000. Oh wait, guess that makes sense seeing as houses don’t depreciate in value like cars do CCA is a depreciation expense… so what happens then? Well you record the rental income for the year, if any, and then you record the disposition of the building on your CCA statement and you must put the lower of cost or proceeds. Well that’s cost, so you put in $100,000, and you end up with -$5000. What happens with that negative $5000? That’s called a recapture of CCA and the whole thing gets added to your rental statement. That’s right! Those deductions you got for the last two years now ALL get added back to your income for 2016! Ouch! Let me guess, now you think, well that wasn’t worth it, sheesh. But wait. There’s more. There is still a capital gain to report. The difference between $700k and $500k = $200k x 50% suite x 50% CG rate = $50,000 added to net income. On top of the $5000 in rental income from the CCA recapture. And then if you have a job on top of that making $50k/year, you now have income of $105k for 2016. Whoa. Hope you set aside some of that windfall from the sale of your house and didn’t spread yourself thin by dumping it all into another property! (A prudent move would be to try and estimate your tax obligations and park it in a TFSA until april 30. A really smart move would be to top up your RRSPs if you have the room.) What? Now you don’t have enough downpayment for the $900,000 house? Ah. That’s too bad. Please wait while I get my tiny violins.

    Oh for those that thought, TLDR, here’s my summary: don’t take CCA on assets that increase in value over time.

  64. Nice thought Leo but do you believe that the government would cut the income tax. Besides was it not supposed to have been a temporary tax until the war was won (World War I by the way).

    Be careful what you wish for because you might get it; actually one usually only gets the bad part.

  65. Tax Filings:
    1/ Canada’s Tax Code favours the “rich”. Hence the “accounting” industry is worth billions$ annually.
    2/ If you are not “rich”, you are disadvantaged as one cannot afford the professional advice

    The Tax Code is archaic at best; totally not understandable at worst. My suggestion is the following if anyone is amendable to this:
    a/ get CC (or an another professional) to do a SAMPLE TAX FILING for a simple declarer
    b/ try to get a ruling from CCRA; which I don’t think is possible
    c/ and crowdfund for this proforma
    d/ or Groupon coupons from a local accounting firm hehe for the lazy people!

  66. Well Marko I have a plan which is at least a start towards some affordable housing. The government should confiscate your rental suite and then rent it out to someone that needs affordable housing. perhaps they can give you fifty dollars a month so that you dont have to pay all the utilities.

    It would be a start and then you could feel better about affordable housing. yes, that is absurd but it is the logical extension of your argument.

  67. More precedence from experts across Canada in regards to Secondary Suites.

    1/ CMHC, very interesting: Almost 80%+ of Canada Muni’s allow for secondary suites. It is very prevalent in terms of financing as shown on CMHC’s way to finance the suite 🙂
    http://www.cmhc-schl.gc.ca/en/inpr/afhoce/afhoce/afhostcast/afhoid/pore/pesesu/pesesu_001.cfm
    Size of Municipalities(population)
    Percentage of Municipalities Permitting Secondary Suites
    Rural (less than 5,000 persons) 68%
    Small (5,000 to 29,999 persons) 82%
    Medium (30,000 to 99,999 persons) 85%
    Large (100,000 and over) 88%

    2/ BDO, big accounting Firm in Canada from Sept 2016
    http://bdoreinvestor.ca/2016/08/31/2209/
    …Secondly, and more advantageous, is where the business or rental use is considered ancillary to the personal use. In such cases, the entire property is considered to qualify for the PRE. The term “ancillary” essentially means that the business or rental use of the property is secondary to the main use of the property as a principal residence. However, if structural changes are made to the property to accommodate the business or rental use, or if capital cost allowance is claimed on a portion of the property, then the full property will not qualify as a principal residence.

    3/ Nice little exemption, PRE even allowed for a house you don’t live in
    https://retirehappy.ca/your-principle-residence-is-tax-exempt/
    A taxpayer who finds him or herself in the situation described above may be permitted to file an election known as a “45(2) election”. If filed, this election would prevent an immediate deemed disposition of your original home and allows you to treat the original house as your principal residence for up to four years as long as you don’t claim depreciation and you are resident in Canada, even though the property is being rented and you are not living in the property.
    So, if you moved out and rented the original house for five years, that dangling one year in the formula above would prove useful, as you could claim the original house as your principal residence for the four years per the 45(2) election and the one extra year per the formula. Any gains realized on the sale of your original home during those years would be sheltered from tax.

    4/ and finally, this isn’t in the only blog that is discussing this 🙂
    http://www.realestatetalks.com/viewtopic.php?f=8&t=129605&p=340341

  68. And, really. If you’re sweating $20,000, then you’ve got a lot bigger problems.

    Furthermore, people these days are taking on $500,000 mortgages without blinking an eye — but give them a five-figure capital gains tax bill and they’ll flip their shit.

  69. Marko, before you pull out that kitchen, might want to also pull all those YouTube clips of you building the house! 🙂

  70. “CuriousCat also mentioned that they could match up tax return addresses to catch the ones that aren’t declaring rental income thinking they can get around this.”

    This is a big part of why I claim the income – wouldn’t take much effort to figure out someone’s living in my basement.

  71. I estimate I could be looking at around $200,000 in capital gains tax if I sell the property. Think we’ll just stay here until we die. Cheers. Love the website.

    A man who prefers death to paying capital gains — I like it. Fortunately that may not be necessary. Taxation rules aren’t written in stone; these new rules, or aspects of them, could be reversed by a future (Conservative?) government — or even at a future point by this government.

    Local government yes but nationally there aren’t that many places with the proliferation of suites that we have on the west coast. The feds may not care that much.

    Maybe, but I’m pretty sure there are lots of rentals in Toronto and its environs. Ever watched Income Property on HGTV?

    I don’t really get your argument? Investors already pay CGs?

    Marko, these are statements, not questions. As such, there’s no need to put a question mark at the end of them; in fact, you shouldn’t.

  72. Instead they wait and sell in seven years for $6 million and pocket $3 million profit, tax free gain.

    So what? Bob and Suzy are speculating on luxury real estate. Sometimes that pays off, like in your examples, and sometimes it doesn’t. Maybe afterwards they buy a property for $8 million and can only sell it for $5 million a few years later. That’s how it goes.

    Not only that but Tom and Sue are being totally treated unfairly when matched up against another suite owners like myself. I get preferential tax treatment because I am well to do and have a 4,600 sq/ft home. So 1,000/4,600 = 21.7%. Because Tom and Sue can’t afford a giant house they are stuck at 800/1600 = 50%.

    Sure, but let’s say the market appreciates at the same rate. Your place is worth $1M and the market goes up 40% to $1,400,000. Their place was $500,000 and appreciates 40% to $700,000.

    Your capital gain: $400,000
    Your CG due to suite = $86,800
    Your tax bill @ 47.7% marginal rate = $20,701

    Their capital gain: $200,000
    Their CG due to suite = $100,000
    Their tax bill @ 38.29% marginal rate = $19,145

    Sure you can do tricks with your company to bring down the tax bill, but that’s always been the case. When you earn more you have more options available to you.

    That said I think a capital gains exemption cap would make sense like the US has. Then cut income taxes to compensate.

  73. Vancouver condos taking a beatdown. Can’t happen here though, our unemployment number is .2 % lower than Van. 😉

    Multiple Offers on Downtown Condos Plummet. Prices fall 5%.

    “The chart above shows Downtown Vancouver condo prices have dropped 5% since June. This was determined using the boards benchmark. Even using median sales price shows a 7% decrease.

    It appears sanity is being restored to the downtown condo market.”

    http://vancitycondoguide.com/multiple-offers-plummet-downtown-condos/

  74. Your general point is that the tax code favors the rich and I think you are right. Those with the most resources always come out ahead in April (or, quite often, in June).

    But when you say, “there is a benefit to society with Tom and Sue renting their suite,” I can’t agree. By renting the suite, Tom and Sue can afford more house. It is ordinary people being able to afford more house, through low interest rates, CMHC insurance on tiny down payments, tax credits for new buyers, rental suites and, most recently AirBNB, that has pushed prices higher and higher and driven ordinary people further and further into debt.

    If all the future Toms and Sues stopped renting their basements, houses would be that much cheaper, and there would be that much more demand for construction of dedicated rental housing. Everyone would come out ahead.

    But even if you don’t share my view of civic planning, I think we can agree that Tom and Sue, as honest citizens, ought to pay taxes on their earning and investments. Hopefully, they’ll have the good sense to hire an accountant to keep them to a minimum.

  75. This is easiest to understand if we go back to the basic principles. When someone earns income or makes a profit, it is subject to tax. So, if you buy something and then sell it for more, that is subject to tax.

    Your principles are perfect in theory, but not in reality. Reality is those making the biggest profits and treating their house as a true business will still make off without paying CGs.

    For example, developer Bob builds townhomes and condos in Langford and is connected in construction. Bob and his wife Suzy buy a waterfront lot in Cordova Bay for a million. They build a house (no suite) from another million and five years later they sell it for four million for a two million dollar profit. Reason given is they don’t like being on the waterfront anymore and it is too far to town. Reality is they want to pocket $2 million tax free.

    After the sale Bob and wife Suzy buy a lot in Uplands for 1.5 million and they build a house (no suite) for another 1.5. Because they are well connected in business they go see their team of accountants which advise them if they sell the Uplands house within 5 years probably a good chance it throws a CRA audit/questions as to why they’ve moved twice in 10 years. Instead they wait and sell in seven years for $6 million and pocket $3 million profit, tax free gain. Reason for sale is they are getting older and can’t manage a 6,000 sq/ft home anymore. Reality they want to pocket $3 million tax free.

    I would give you more examples of Bob and Suzy but have a few things to do tonight.

    Tom and Sue on the otherhand live in the Oakland’s area and rent the entire basement of their 1950s 1,600 sq/ft bungalow. They pay yearly income tax and they get hit with CGs at the end of it too.

    Not only that but Tom and Sue are being totally treated unfairly when matched up against another suite owners like myself. I get preferential tax treatment because I am well to do and have a 4,600 sq/ft home. So 1,000/4,600 = 21.7%.

    Because Tom and Sue can’t afford a giant house they are stuck at 800/1600 = 50%.

    Yes in theory those who use more of their house for a suite should pay more tax but just doesn’t translate well to reality.

    The other reality, just like electric cars/carbon offsets, etc., is there is a benefit to society with Tom and Sue renting their suite. The government has done nothing to provide affordable housing and Tom and Sue are picking up the slack. Just google “renting reddit Victoria” or “renting reddit Vancouver.” It’s kind of nuts out there.

  76. Retired guy – that is exactly what we would like to do with a suite in our new house (if we do build one in the end). A variety of uses, including personal and family, as well as rental. When I bought my first house 10 years ago, I rented rooms to students to help cover the mortgage for 2 years. This would be an extended version of the same thing.
    I’m now thinking Marko has the right idea with the ‘small suite’ concept. Low square footage relative to total house size, expect to pay CGs, and we’ll do ok.

  77. I am trying to understand the implications of all of this from an enforcement standpoint. My annual tax return will have a form which will list my principle residence, date of purchase, and its adjusted cost. My current and previous tax returns will also reveal any rental income. This all goes into the Ottawa Cloud of CRA data. The CRA Data Cloud also has addresses for all Canadians who have filed tax returns over the last several years. It will be child’s play to write the computer code to allow a search of all taxpayers who have lived at that address and filed returns even for a GST rebate etc. IF: last names are different from the owners for any of the years since the date of purchase, THEN: flag. For low hanging fruit, THEN: double star all cases where two (n) or more taxpayers have reported that address or that address with an A, B etc. on their tax returns. Now, check tax returns of the home owner for each year since house purchase for any reported rental income. IF none for years that others reported the address, THEN: Boom, we have the Tier One audit target list. Now hire an army of auditors.

  78. Newcomer:

    That was an excellent and clear explanation. Now you will hear the bleating and the complaints followed by loud whines.

  79. This is easiest to understand if we go back to the basic principles. When someone earns income or makes a profit, it is subject to tax. So, if you buy something and then sell it for more, that is subject to tax.

    But if you buy your own house, just to live in it, and then some years later you move, if your house has gone up in value, you could have to pay tax. That’s a problem because the other houses will have gone up in value too. By paying the tax you cease to be able to afford an equivalent house. Being locked down like that by having to pay capital gains tax every time you move is a disincentive to ownership. So they made an exemption. We can all see how that is fair.

    Conversely, if you buy a place to live, and at the same time, you buy (or build) a separate thing intended to produce income, it is a different story. Let’s imagine you buy a house with a ping-pong ball factory in the back yard. If you move and, at that time, sell the ping-pong ball factory for a profit, you won’t expect that profit to be exempt from tax. Why not? Because the exemption is only for your residence, not for your business.

    The same is true for businesses like rental suites. Say you have a 3000 sqft house, including a 1000 sqft rental suite. That means you live in a 2000 sqft unit. When you move, you get an exemption on the 2000 sqft unit, which will allow you to buy an equivalent 2000 sqft unit somewhere else. If you also want to buy a rental suite or a ping-pong ball factory at your next address, go right ahead, but don’t expect a special tax break in doing so. There is no reason for the rest of the country’s taxpayers to subsidize your business, just because you located it on a property that you also used for your residence.

    That is why the judge in this case looked at the housing unit that constituted the residence and the suite as separate things. A residence is a thing you live in or use as part of ordinary enjoyment of your home. The suite in this case was an investment property, which was not lived in and therefore not subject to the capital gains exemption.

    Unfortunately, some people misunderstand the purpose of the capital gains exemption and think that it is intended to free property owners from the burden of paying taxes on investments and businesses such as rental properties. It never was intended for this purpose and, now that there are new reporting requirements, people will be reminded of the actual purpose of the exemption.

  80. Hawk said: “Speaking of foreigners, they’re all moved on to new places they can pillage. ”

    You might be right Hawk, it seems the Vancouver Real Estate Board is reluctant to update their monthly statistics charts for September:
    http://www.rebgv.org/listed-vs-sold?

    When the news is good, they update within the first couple day of the following month.

  81. Let us know what you eventually decide to do with your own rental suite. I am sure that it will take a bit of time for careful consideration.

    I wouldn’t jump to any conclusions quite yet and start ripping out suites. I think we will get more clarity on this in the next few months.

  82. We now have the lowest unemployment rate in the country.
    The national rate is 7.0%.

    — Edmonton 7.7

    — Kelowna, B.C. 7.3

    — Abbotsford, B.C. 6.0

    — Vancouver 4.9

    — Victoria 4.7

    The Canadian Press – Oct 8.

  83. Speaking of foreigners, they’re all moved on to new places they can pillage. Whose going to buy all those Victoria wannabe’s places now ?

    CMHC data shows foreign buyers have almost disappeared from Vancouver market

    “Foreign buyers dropped to one per cent of the Vancouver resale market after being as high as 19 per cent, according to a new report from Canada Mortgage and Housing Corp.”

    http://www.theprovince.com/cmhc+data+shows+foreign+buyers+have+almost+disappeared+from+vancouver+market/12261725/story.html

  84. If investors pay their CG’s then they don’t have CRA on their back. As we well know millions don’t pay rental income tax and that is now going to drive many smart ones to sell now, claim a year’s rental and hope for the best. If you wait til CRA starts digging into all your other years you never paid it could be much much worse. Multiple hoarders will get hit even worse and be forced into selling to cover unpaid taxes.

    Yup. Gosh I know a Chinese guy that has an investment condo that he sold and hasn’t reported the rental income. I’m not quite sure if he sold it this year or last… man, I hope it’s this year. It’s about time some people start getting caught!

  85. Room and board, renting a couple rooms out, homestay, those situations should not affect the PRE.

  86. If investors pay their CG’s then they don’t have CRA on their back. As we well know millions don’t pay rental income tax and that is now going to drive many smart ones to sell now, claim a year’s rental and hope for the best. If you wait til CRA starts digging into all your other years you never paid it could be much much worse. Multiple hoarders will get hit even worse and may be forced into selling to cover unpaid taxes.

  87. It would do the opposite, why would you buy to be a landlord so you can make less money ? You would go invest elsewhere where you can find tax breaks and not get scrutinized by the CRA.

    Basements suites and condo rentals could be become the ball and chain for investors encouraging more to sell and flood the market which is what the government wants: lower prices and higher inventory.

    They would rather you spend your money buying more crap to keep the economy going than paying tax/higher prices on housing. This is the death knell to the bubble but most won’t see it until it’s too late like most bubbles.

    I don’t really get your argument? Investors already pay CGs? Nothing changes for someone buying a second house to rent out or a condo. We already have enough real estate hoarders in that group.

    What I am saying is it makes it less attractive to sell your principal residence. For example, if you are retired and you are thinking about possibly downsizing it could influence your decision as CGs become another massive transaction cost on top of commissions, property transfer tax, legal fees, etc.

  88. Marko:

    Let us know what you eventually decide to do with your own rental suite. I am sure that it will take a bit of time for careful consideration.

    On a different note, any feedback on the impact of the new mortgage rules? Any scramble to buy before they come into play?

  89. I wonder how this would play out for having room and board or renting a room out. Its revenue but not a suite. Would the primary exemption still apply?

    Appears that you are fine renting out rooms within your home. You still have to report the income, but CG should not apply?

  90. One of the big issues with capital gains taxes arises when you have held on to a property for many years. Are you actually being taxed on a real increase of the value of a property or are you actually just being taxed on inflation.

    A lot of people are relying on the increase of the value of a property for their profit and not for the rent it generates. Basement suites in some way often come with a very real intangible cost in that the tenants can interfere with your own enjoyment of your home.

  91. Interesting conversation. Thanks for all the info. Guess I should eventually sit down with a professional property-tax person to get help figuring out potential capital gains taxes. We own a house purchased about 30 years ago for approximately $350,000. It’s now worth about $1,500,000. The preexisting basement suite was where our teenage kids lived, running up and down the internal stairway to raid the fridge, etc.. After they moved on we rented the area (declared the income – $600/Mo) to a retired couple who stayed for six years. And in the early 2000’s the suite became a July-August B&B (declared income – $7000/season). Did this for about 10 years. The suite is now where my daughter and family stay when visiting from out of town. It’s also where I go for quiet afternoon naps. I estimate we could be looking at around $200,000 in capital gains tax if the property is sold. Shouldn’t have bothered renting – big mistake. Cheers. Love the website.

  92. ” Applying CGs could encourage even more hoarding, especially with the combination of interest rates and rental market.”

    It would do the opposite, why would you buy to be a landlord so you can make less money ? You would go invest elsewhere where you can find tax breaks and not get scrutinized by the CRA.

    Basements suites and condo rentals could be become the ball and chain for investors encouraging more to sell and flood the market which is what the government wants: lower prices and higher inventory.

    They would rather you spend your money buying more crap to keep the economy going than paying tax/higher prices on housing. This is the death knell to the bubble but most won’t see it until it’s too late like most bubbles.

  93. I wonder how this would play out for having room and board or renting a room out. Its revenue but not a suite. Would the primary exemption still apply?

  94. Sounds to me like the Liberal government is going to make a lot of money back on the books. Homes with suites may soon sell at a discount vs a premium. Who needs the hassle.

    Months before this topic even came to light I noted the #1 reason I wasn’t selling my investment properties right now was CGs. If it wasn’t for CG I would let my unit at the Era go tomorrow.

    You never know how these types of things play out. Just Jack already pounces on the theory of “real estate hoarding,” as a major issue in the marketplace. Applying CGs could encourage even more hoarding, especially with the combination of interest rates and rental market.

  95. If the CRA fires this up and starts enforcing it won’t last 5 years. Political pressure will be too massive to amend this. The government has shown as of late that they are willing to give into political pressure. I.e. crackdown of Airbnbs in Vancouver; pressure from tenancy groups.

    Local government yes but nationally there aren’t that many places with the proliferation of suites that we have on the west coast. The feds may not care that much.

  96. I agree with Cat; his reasoning seems extremely sound on the kitchen.But you also have to actually use the space; it should not remain vacant and unused. Cat do you agree with that?

    The way I am interpreting use of space is it’s totally fine to have a 6,000 sq/ft home in the Uplands with a 2,000 sq/ft basement that you never use that because it has no kitchen (can’t possibly be rental suite).

    However, if you have a home with a suite (basement with a kitchen) than you are responsible for CG even if you don’t rent it, if you leave it vacant (as per case in Quebec).

    Therefore, let’s say you are buying a home with a suite that you won’t use, or rent, maybe because at your last place you ran into a nightmare professional tenant that exploited every single tenancy act dispute rule and made your life a living hell for a year. Taking out the kitchen right off the bat would be the safest thing to do. If you plan on using the suite just take a lot of photos of you hanging out in the suite?

    The biggest different between you and the individual in the Uplands is a kitchen. The Uplands house for sure also has an exterior access to basement, most likely a three or four piece bathroom, a bedroom, and media/play room that could double as a living room.

  97. Gee Cat; are you suggesting that the media is biased and self interested; I am totally shocked and appalled by that. It is like the old saying “Where you stand on an issue depends on where you sit to eat.”

  98. @barrister – good luck with that! I think Hawk is trying to bring up the fact that much of the TC’s revenue comes from selling ad space to realtors, mortgage companies, etc, and that they would be shooting themselves in the foot if they published articles that doesn’t help support that industry.

  99. Further, as professional accountants, we are required to take 20 hours of professional development courses per year. This is equivalent to 3 full day courses. The topics of these courses are decided by the seminar leaders hired by CPA Canada and though they are varied, offerings seem to be limited to the same topics year after year. There has never been a topic that addressed this. Perhaps now they will. Seems to be enough material for at least a half day course. 😉

    Our firm takes one course every year in January/February called the Personal Tax Update. This is where Tom Devaney will summarize all the changes to the Income Tax Act and highlight what we need to know, look for, pay attention to. It helps if the govt decided to table their budget early so those can be included as well, but if not, then we have to go based on what we know. He also likes to tell us about recent tax court cases, but that’s usually the extent to which accountants explore those. I am fairly confident that Tom will do a lot of research on this topic in preparation of his seminar, which he travels the country and delivers to thousands of accountants right before tax season. Therefore, in January/early February, we accountants will be in agreement on if, when, how to apply these new rules. Because someone else will have gone to the trouble to research it and get guidance from CRA and then get feedback through these seminars from other accountants, etc. (This is when one accountant will raise his hand and go, so my client got audited on this and this is what CRA said. Then the other accountants go, oh wow, really? Tell us more!) By the end of it, we’ll all look at each other and go, yeah ok, that sounds about right. Yeah, let’s go with that, and we leave the seminar with a general consensus of what to do.

  100. Actually I am a bit surprised that there has not been more in the Times Colonist about the changes.
    I think i might phone the business editor since I enjoy being ignored.

  101. A lot of the cases I read, the judge was much harsher in assigning gross negligence penalties to taxpayers that are also in the “biz”. Homebuilders, real estate agents, real estate lawyers, these people have more insider knowledge of the market then the school teacher, thus there is an increased expectation on them to know the rules of the industry that they are operating in and not exploit them. If you are a car mechanic renting out your basement suite, you fail to report the capital gains and get hit with a notice of reassement, it is very unlikely you were assessed the maximum penalty. They have to believe you “ought to have known” based on your occupation, education, etc.

    It is when these people get hit with the gross negligence penalties right from the start that they figure they have nothing to lose and take their case to court. It is much the same with ANY audit. If the client gets away relatively lightly, we tell them, just pay it. If they were assessed punitive penalties, then we tell them where we believe the auditor is wrong and it could be worth it taking it to court because perhaps you can convince the judge to view it our way. At least you have a “shot”. At the very least, if we can get them to reverse or reduce the penalties, then it’s a win for the client.

  102. Sounds to me like the Liberal government is going to make a lot of money back on the books. Homes with suites may soon sell at a discount vs a premium. Who needs the hassle.

    Might even spawn a new HGTV show: Landlord/Slumlord Court – Did it really rent to 5 starving students or was it a man cave ? Tune in tonite to find out. 😉

  103. I agree with Cat; his reasoning seems extremely sound on the kitchen.But you also have to actually use the space; it should not remain vacant and unused. Cat do you agree with that?

  104. *What’s to say that a judge would believe my testimony that I used the suite for x,y,z purpose?

    In my view that only thing that is not open to interpretation is no kitchen. Makes everything else irrelevant like whether the space was used at all or not.*

    They say that the truth has a ring to it. A judge should be a pretty good judge of character, that is his job, after all. If you are speaking the truth, then what do you have to fear? But if it makes you feel better to remove the kitchen, then go ahead. I could see the judge saying you built the suite to generate income and because you believed you would be able to sell your house for a higher profit. As a realtor, you are well-positioned to know that having a suite in a home increases the value of your house by $x, and that even leaving it vacant, you are anticipating a greater profit on resale. Removing the kitchen would prove that you really did choose to reclaim the space, not that you simply decided to better “preserve it” for future sale.

  105. Before you dont declare rent get a large picture of Al Capone at Alcatraz and post it on your bathroom mirror. he got away with murder but not from failing to pay taxes.

  106. Dear marko:

    getting rid of the kitchen certainly would help but you also have to make some use of the space for your personal needs. Generally if you can get a few friends or neighbours to testify that you have your crap all over the basement and that you use it for a card room or man cave or whatever this will usually convince almost every judge. No kitchen helps and above all no more rent being collected.

    Have you asked your wife about the stripper pole yet?

  107. My friend was upset because she has been reporting her rental income and she sold her house in February. She just told me that her sister, who also sold her own home that same month, never reported their rental income. (Her brother-in-law actually laughed at her and said she was stupid for reporting it.) The reason she is upset is that they basically “get away” with not paying for the rental income or the gain. She regrets doing the right thing…

    For those that think that, don’t despair! On the disposition form, you’ll need to put down three important details: the date you bought the house, the date you sold, and the address. People won’t think to lie because all that information is easily verifiable. If they omit the sale completely there are huge repercussions so people will most likely report the sale and just claim it’s all principal residence, especially if they never reported the rental income. But that’s how they’ll get caught! Once her sister reports on their tax return that they sold their house, the CRA will know that 666 Evilsister Lane was owned by Lucifer and Jezebel Smith from 2012-2016. All they need to do now is run that address in their database and take a look and see, who else filed a tax return  with that mailing address? Well lookie here! In addition to Mr and Mrs Smith, Ms. Anderson lived here in 2012, and Ms. Lancaster lived there from 2013-2015. How very interesting! What an EASY way for them to pick their next audit file, n’est-ce pas? 

  108. I’d like to point out another thing. People seem to think that because we haven’t heard many cases like this, that this somehow supports the view that their situation doesn’t apply. I think there is a reason for this. CRA does not know what property you own. They do not know if your mailing address is your principal residence. They do not know when you sell your property. If, by other examination, they find out, then they will reassess you and you will then have a choice to accept the reassessment and pay the taxes, or you may file a notice of objection. If your notice of objection fails, then you can take the matter to court. The tax court of Canada hears something like 300ish cases a year. Having your case heard, could take years. Most likely, most people, are simply accepting the notice of reassement and paying it and not going all the way to court to fight. That is why there aren’t many tax cases to review. Also, most accountants are not spending their free time reading thru pages of old tax cases. That’s what we have tax lawyers for. We rely a lot on whether or not we have a client who has ever been audited on a matter to give our opinion. But the relative number of clients that get audited are usually low to begin with. So the sample size is very small. And the reason for that is based on what I pointed out. CRA didn’t know you sold your house. But now they will.

  109. First of all, seeing as everyone keeps going back to this: The judge in this case DID NOT believe that the kids went downstairs to watch TV. He believed that the space wasn’t used AT ALL. He did NOT believe the guy’s testimony. So let’s all stop freaking out about how even letting your kids watch TV isn’t enough to meet the ordinarily inhabited rule.

    What’s to say that a judge would believe my testimony that I used the suite for x,y,z purpose?

    In my view that only thing that is not open to interpretation is no kitchen. Makes everything else irrelevant like whether the space was used at all or not.

  110. Dear Curious Cat:

    Totoro reminds me of a lot of my clients. I should not have to pay spousal support because she was not really a wife because she was constantly screwing my best friend (sorry, I am not bringing in your German Shepherd to testify to that) and besides she never cooked any of my favourite food and it was not a marriage because she was young enough to be my grand daughter. I am reminded why I retired.

  111. Marko:

    i would caution again that I am not a tax expert at all and I could as easily be wrong as right. This is not and never was my area of expertise. So for professional advise you really have to turn elsewhere. Do not rely on my opinion.

  112. Holy cow Batman! There are a lot of comments to comment on! Lol

    First of all, seeing as everyone keeps going back to this: The judge in this case DID NOT believe that the kids went downstairs to watch TV. He believed that the space wasn’t used AT ALL. He did NOT believe the guy’s testimony. So let’s all stop freaking out about how even letting your kids watch TV isn’t enough to meet the ordinarily inhabited rule.

    In this case, the guy’s intention, from the start, was to build a separate apartment as he built it specifically with a separate entrance giving no access to the rest of the house. And he marketed the house as such, giving emphasis that it had a separate apartment, therefore receiving, most likely, a premium for his residence, which he then should pay capital gains on.

    @Barrister, so far I agree with everything you are saying. You have an excellent grasp of the law and yes, you and I are interpreting the judge’s decision the same.

    @totoro and others: holy cow we are loving to throw in all these assumptions into this case to somehow make it fit whatever you want to argue: first you say the guy is lying thru his teeth throughout the case and the judge wants to nail him to the wall, but then you say you believe his kids used the basement. Then you said he was a serial housebuilder. If that was the case, why didn’t the Minister bring that into evidence? I have read many other tax court cases where that was indeed the evidence and they made their ruling based on that. And then you say this guy had his furniture there. Where the heck did it ever say that???

  113. Marko:

    I agree, no one actually has a clue. The point of getting advice is to clearly document the fact that your intention is to take over the rental suite for your own use. For one thing it would document the exact point in time that you decided to take over the unit and further it would remove any doubt about whether changes were intentional and not just cosmetic. What the taxpayers actual and real intention is often important to a court. it is like building a wall with bricks; the more bricks the higher and the stronger the wall. The devil is in the details.

    The law is rather unclear but if it was me personally I would get rid of the suite if I did not really need the money desperately. After paying extra income tax at your high marginal rate, extra house insurance and extra maintenance and wear and tear how much do you really make anyway? is it really worth the aggravation of having a tenant?

    If you do decide to get rid of the tenant you should get an appraisal on the value of the house on the date the tenant leaves. Trying to figure that out twenty years later when you actually sell the house would be a pain.

    Should you wait to see what the CRS is going to do with this is another question. One of my concerns is that they actually dont have to change the law or the income tax act at all in order to start collecting this tax. Them not chasing one for the tax is really different than whether one should have been paying it in the first place.

    remember everyone is presumed to know the law (except for judges, they have the court of appeal to tell them what the law is– sorry old lawyer joke from an old lawyer.)

  114. Just finished listening to Ozzie Jurrock and Michael Campbell whine like babies about all the new tax laws. Pretty pathetic how they have no problem talking about debt bombs all the way up, but now that they are going to lose money it’s all just a tax grab and an attack on the good ole mortgage industry who’s been giving money like candy to those they shouldn’t have been. Two faced or what.

    Ozzie did say the media is under reporting the severity of what is going to happen here as it now will cut out 40% of buyers. That is huge.

    Speaking of media, is there even one article in the TC the past couple days on the new laws ? Zilch, nada, nothing. So much for an independent news source that never says a bad word about the real estate industry who pays their bills. What a fricking joke.

  115. Marko:

    If you are ever down in Rockland and would like to get together for a coffee or a glass of wine my wife and I would be happy to host you. Let me know and I can email details to your office.

  116. getting expert advise is also good

    Tough to get expert advice when we are having to reference a case from Quebec 7 years ago that is still not a clear cut application to 95% suites in Victoria/Vancouver.

  117. Marko:

    I agree that there is no simple answer but one of the things that is important is that the full time residents use the space regularly. Taking part of the kitchen out probably is a good idea. I would certainly get rid of the stove and dishwasher; probably leave a beer fridge and sink down there.

    My inclination would be to really decide to actually use the extra space for myself and proceed from there. getting expert advise is also good but document that by making it clear that it is your intention not to rent the space and that you need to take it over for your personal use. That is very different than trying to arrange a scheme to get around the rules.

  118. Personally I doubt if very many people will get rid of their suites. The vast majority of people are not nearly as informed or sophisticated about it as you are. First time buyers in particular are a lot more worried about making this months mortgage payment than some tax ten years down the line that really only matters if they make a lot of money on their house.

    My guess is that the politicians will immediate say that they need the money from these rich homeowners to pay for more publically assisted housing.

    Very few will get rid of their suites, but when vacancy is 0.6% even those that do will create a problem.

    Home ownership in Canada is close to 70%. Not sure how you get elected without those votes? You won’t gain votes with Joe without a suite because Suzy next door with a suite is paying CGs. But you’ll certainly lose votes with Suzy when she pays CGs and Jack in his waterfront Uplands property pays nothing on a massive profit.

  119. Some people on this blog are saying that CRA is not enforcing the Capital Gains rules. If that’s true, it’s probably prima facie evidence that tax evasion is rampant by most home owners with self contained suites. If you have a self contained suite, and if you are honest and declare your rental income from your suite, then the CRA will flag you when you stop declaring the rental income. Conversely, if you never declare your rental income, then CRA will be unaware of your suite, and by extension, they won’t come after CG taxes.

  120. You might be right about the political pressure but the campaign against AirB&B seems to me to be focused more on taxing them than getting rid of them. The politicians see gold in them there hills.

    I’ve been watching it unfold in Vancouver and I think the focus at this point is to elimiate Airbnb. It’s 90% housing problem pressure, 10% tax, if that.

    Restricted to principal residences

    Under the proposed rules for short-term rentals, homeowners would be able to get a licence for their principal dwelling.

    They would not be able to get a licence for secondary units on the property — such as basement suites and laneway homes — according to Matheny Krishna, the city’s general manager of building licensing.

    “We are defining it by the dwelling unit, not the entire property. So if there are laneway homes and secondary units, those are not considered,” said Krishna on Wednesday.

    “Those would be separate units and those would be required to have a licence, or in this case it wouldn’t be their principal unit so they wouldn’t be able to do it.”

  121. Marko:

    You might be right about the political pressure but the campaign against AirB&B seems to me to be focused more on taxing them than getting rid of them. The politicians see gold in them there hills.

    Personally I doubt if very many people will get rid of their suites. The vast majority of people are not nearly as informed or sophisticated about it as you are. First time buyers in particular are a lot more worried about making this months mortgage payment than some tax ten years down the line that really only matters if they make a lot of money on their house.

    My guess is that the politicians will immediate say that they need the money from these rich homeowners to pay for more publically assisted housing.

    Marko, I would not even start the discussion on limiting the principal residence deduction. You might think that it would only limit it for the rich but I can almost guarantee that before you know it they will decide that you are one of the rich. Remember that the income tax was only a temporary measure until we were able to defeat the Hun in world war one ( I could have sworn that world war one is over).

  122. I am not an expert in this area but I think a bit of common sense goes a long way

    But the guy in the case had his kids use the suite from time to time and did not rent it. That would be enough for me, wasn’t enough for the judge? The 100% common sense factor in my opinion that ends the discussion right away in an argument or court is no kitchen.

    Everything else can be argued such as an interior staircase. Reality is everyone locks up their interior staircase and tenant uses the exterior and it’s a rental suite.

    Or is a picture of you playing beer pong in the space enough to say you’ve used the space regularly? etc.

    Just saying, if you actually took this case in Quebec 7 years ago at face value.

  123. Marko:

    1) I dont think you have to rip the kitchen out necessarily depending on a number of other factors.

    A) do you have an internal access to your suite.

    B) You would actually have to make some use of the space that is typically used in a principal residence.
    For example convert the kitchen into a wine bar and have either a pool table or card table in the basement. Make sure that you actually have friends over (we all would volunteer to come over to drink the wine. A music room, sewing room or even a room for luggage storage would also work; make sure you do things like put up shelves for the luggage.

    turning it into your “man cave” falls within a reasonable personal use of the space as well. (installing a stripper pole might be a bad idea.

    If it is an independant entrance make sure that you rekey the lock so that the usual housekey fits; ask the locksmith to document the purpose of the change on his bill.

    C) Because you have been using it as a rental you are going to really have to document the fact that you have taken over the space for your own personal use.

    D) I am not an expert in this area but I think a bit of common sense goes a long way.

  124. Will CRA actually pursue this is a political question of policy.

    They really need to put in place a max principal residence exemption otherwise it will be a nightmare for the government, politically speaking.

  125. If the CRA fires this up and starts enforcing it won’t last 5 years. Political pressure will be too massive to amend this. They will either need to scrap it altogether and or likely they will need to introduce a max exemption of $250,000 or similar for homes without a suite.

    Just think of the stories out of Vancouver. “Student,” or “homemaker,” flips home in Kits for $2,000,000 profit, zero tax. Single parent in Surrey living in basement suite and renting upper portion of their home to survive assessed CGs on 60% of increase in value.

    Or grama with house next to UBC keeps keep suite vacant due to family concern about CG upon sale. I am sure the tenancy groups would love that one.

    The government has shown as of late that they are willing to give into political pressure. I.e. crackdown of Airbnbs in Vancouver; pressure from tenancy groups.

  126. The new reporting requirement will allow them to quickly match any sale to any reported rental income

    CuriousCat also mentioned that they could match up tax return addresses to catch the ones that aren’t declaring rental income thinking they can get around this.

  127. Leo:

    I believe the problem for CRS up to now is that they had no way of knowing that you sold a house and were not reporting because you felt that it was a principal residence. In most cases it is the sale that will trigger the tax.

    The new reporting requirement will allow them to quickly match any sale to any reported rental income. Will CRA actually pursue this is a political question of policy. Debating what politicians are going to do is lots of fun but one might bear in mind that oil revenues are really down and manufacturing in Ontario is being gutted with revenues really down.

  128. I think I have the same question as Ash. If we gave our tenant the boot and never rented the suite again, a deemed disposition would have occurred.

    If you take this case for what it is worth booting your tenant is not enough, you would have to rip out the kitchen at the very least in addition.

    the judge never once in his decision, refers to the size of the apartment to say it’s too big or too small or just right for the principal residence exemption. It’s only ever used as a calculation for the gain.

    Exactly, you can circumvent this by building a really small suite. If you are building a 3,000 sq/ft in Fairfield instead of doing a 950 sq/ft suite in your basement where tenants can be comfortable just do a 528 sq/ft two bedroom (check out this new development in Victoria, http://thewade.ca/floorplans/ – Junior two bedroom plan C or E).

    528/3000 = 17.6% x .5% x .4 = 3.52% tax paid on your profit. That is not the end of the world.

  129. I really suspect that the main touchstone is whether you have rented the space to someone.

    That seems somewhat reasonable, but the guy in this case had never rented the suite and had used it himself.

    Advertising it, when you are selling the unit, as an independent “mortgage helper” might be a pretty big factor in the decision.

    Seems likely but the change of use removing the exemption requires a for profit motive on the part of a taxpayer. What a third party does with the suite if the taxpayer never profited from it doesn’t seem like it should remove the exemption. Here it did and that seems like it goes to far to me and opens the door for the removal of the exemption in all sorts of cases that it should remain for.

  130. 1) First, an internal staircase will not change anything if the space is actually rented.

    2) On the other hand an internal staircase is a good idea if the basement apartment is meant to be used from time to time by your adult children or your mother in that when the family is absent then it can by used by you as a spare bedroom or guest suite.

    3) Before people create new myths on how to get around this, I really suspect that the main touchstone is whether you have rented the space to someone; basically by renting a basement suite you have given exclusive use to that portion of the house to someone else other than your family.

    4) This case went a step further and states that if you have in effect created an independent apartment then you have intentionally removed it from being a part of the principal residence.
    That is much more of a grey area were a number of factors would have to be weighted and examined.
    Advertising it, when you are selling the unit, as an independent “mortgage helper” might be a pretty big factor in the decision.

    5) Lets be honest here most people in 98 percent of the questions on this site are talking about a suite that they are renting out to a third party.

    Curious Cat: do you agree with some or all of the above since you actually researched it.

  131. Makes you wonder why CRA has not pursued capital gains on the typical Victoria suite

    We just heard from LeoM that that is exactly what they did for his suite. The new reporting rules will make it much easier for them

  132. Seems like an unusual case compared with typical Vic basement suite stories.

    Makes you wonder why CRA has not pursued capital gains on the typical Victoria suite where you don’t have ordinary use and you do have for-profit on a regular basis because that is a stronger case than this one was.

    Clearly CRA had it out for this guy for a number of reasons and the judge agreed and looked for a way to remove the exemption by focussing on not meeting the ordinary use test – which he does seem to have met based on the CRA bulletin – kids using it occasionally and his furniture there. Makes ordinarily residence into a more difficult proposition.

    Right now the bulletin states if you have a condo and house and even a second house you can deem any one of them (but only one per year) your principal residence even if one of them is hardly used so that ordinarily resident decision requiring something more is very odd and not in line with this. And this whole capital gains issue may be why there are so may vacant places in Vancouver not rented out – once you start renting there is a change in use.

    If CRA started taking this position with a family struggling to make it with a suite rented to students the facts could be less popular with a judge and would likely be less popular with the general public, but it appears CRA would probably win.

  133. I dunno – storing luggage (violin, whatever) vs storing a tv, and having your kids down there once in a while sound pretty similar. I’m no lawyer, but it does kind of seem like the judge was pissed off at this guy and the separate address and no interior access would have been considered important. I mean, he had personal effects down there, right? Ok, we don’t know the details.
    Seems like an unusual case compared with typical Vic basement suite stories.

  134. I’ve updated the title to be more definitive after some more thought on this. As CC and Barrister stated, the separate address and lack of internal access are not the key points here, it’s that it’s a separate living area not ordinarily inhabited by you.
    Yeah maybe you could make the argument with an internal staircase but now you’re crossing over from figuring out if it’s legal to figuring out how to get away with tax evasion.

  135. Totoro:

    Think of it like owning a vacant condo; even if you dont rent it you will pay capital gains when you sell it.

    My carriage house is not an apartment it is a two car garage with my car and a workshop in it.
    Also it has a very beautiful wife and her accordion. Sorry but it is late and time for bed; we should all be grateful for CuriousCat taking the trouble to look up the tax cases.

  136. Numbers Hack:

    You ask a number of interesting questions:

    1) I never speculate on what a court of appeal might do although I often told clients that if they really wanted to appeal a trial decision then the first step would be to hand me a fifty thousand dollar retainer.

    2) I am not an expert on Tax Law so my opinion counts for very little. On the face of it, if I had to guess, I really dont see any flaws in the courts logic. Certainly there are areas of grey that can arise
    and clarification would be great. But in most cases, if you are renting an apartment then somebody else is using that apartment as their home. That means you are not using it as your home. Lets be honest here, that is sort of black and white.

    3) Will the government make a policy decision that allows the principal residence exemption to also couver suites in a house. Basically, that would be a political decision that in effect rewrites the present law. If you know what politicians will do then you have a better crystal ball than I do. But you might want to consider that this provision really only has a major impact when houses prices have had a very large runup in value. Politically, it only affects landlords and only really effects landlord whose house has gone up a lot in value and they are all getting rich on the housing boom anyway. (why is there no universal symbol for sarcasm by the way?)

  137. Curious Cat:

    Would you agree that a self contained suite rented long term to strangers would fall outside the principal residence definition.

    I am mostly asking the question in response to some posts that thing that there is an easy way to weasel around this basic situation. I think that is just asking for trouble.

  138. If I was not clear in my earlier note; I do not believe that use requires frequent presence. Having a room for storing your luggage still means that you are using it on a regular basis even if you rarely ever visit that room.

  139. Totoro:

    In my case the carriage house is actually used by me on a regular basis; the carriage house has a two car garage in it. Also my workshop is housed in the carriage house. The upper floor is used as my storage for summer items while part of it is regularly used by my wife to practise violin and her accordion.

    Just using it as a garage would be considered normal family use for this type of building. On the other hand if I rented it out to a tenant then I would have lost the status of being part of my principal residence. I believe that any court would take a reasonable view of what is normal use of a home.
    I dont believe that any court would expect people to proof that you spend endless hours in either your storage room or the mechanical room staring at your hot water heater or furnace, The same would apply to the fact that many homes have spare bedrooms used for visiting company or relatives.

    The importance of this case for practical terms is that most certainly any self contained unit that is actually rented would clearly fall outside the principal residence exclusion. I suspect that would cover most of the “mortgage helper ” suited in Victoria.

    Certainly renting just a room to a student occasionally or renting the occasional weekend AirB&B are not clearly covered by this ruling. But it would seem to settle the issue of renting a full time suite in the house.

  140. Great work CC.

    @ Barrister
    Totoro made some very valid points in his interpretation of his ruling. My question is this is a lower court ruling, from a litigation standpoint, what are the chances of winning an appeal on this? There are obvious confounding factors that might have/might not have contributed to his decision.

    As suites are ubiquitous in high cost areas, this decision would have more ramifications than the recent changes concerning buyer’s tax + mortgage stress tests. 1500$/month = approx. $250K worth more buying power.

    Also, this seems to be a GREY area for CCRA. This issue has been around for nearly a decade and I am positive that CCRA doesn’t know how to treat it either. Sometimes it is better to let sleeping dogs lie; just think of the political fallout if this was fully affected across the country.

  141. I think the problem is that this case does not really clarify any of those points because it is so fact specific. We are still left with a bunch of vagueness and I’m not even sure if you can have a vacant suite without capital gains.

    A single guy in 1800 square feet – we have no space limitations on housing here and he does have dependent children staying who presumably each have rooms in the house.

    Barrister and his wife live in 7,965 sq. feet with no dependent children if I understand his retired state correctly, and they have a separate carriage house. This case provides no guidance on this scenario really. Is he now at risk of capital gains on the carriage house because he is not ordinarily inhabiting it? If not, why not based on the logic in this case?

    Because he did not build it? Case nor Act say you have to have built it – no real guidance.
    Because it does not have a separate address? Case nor Act say that – no real guidance.
    Change of Use – Not rented so no direct income so doesn’t seem to fit in Income Tax Act change of use removal of exemption.
    Because he does not ordinarily inhabit it? Yes, the case finds this test is not met as he is not using the space enough, even if he is not renting it out and no one else is using it.

    Be nice to have a bit more clarity instead of guessing aka worrying for those who have suites that they thought were exempt.

  142. And the other thing: the judge never once in his decision, refers to the size of the apartment to say it’s too big or too small or just right for the principal residence exemption. It’s only ever used as a calculation for the gain.

    Not sure what your point is? It seems like it turns on ordinarily inhabited plus built and marketed as two units by a sophisticated investor who serially built fancy homes, lived in them for a year, and then sold for a profit.

  143. Okay I lied, one more response before bed.

    Totoro, I think the problem with the apartment is that there was only external access to the suite. It was mentioned in the case that it was only accessible by the exterior door. This would make it much more inconvenient and unlikely for someone living in a locale like Quebec where there are harsh winters to simply “run outside and thru the exterior door” simply to watch TV. The dude was a single guy, living in 1800 square feet on the top two floors, more than enough for a single person AND the two kids that only come by every other weekend. I too, would of had a hard time believing anyone was actually going down there to just hang out.

    I think if you have a suite, make sure it has an interior access to the rest of the house. You can have your parent or nanny live in it, as long as you are allowing that parent and nanny access to the entire house and you aren’t charging them market rent. If you really want to be safe, make sure the kids hang out with the nanny or grandma in their suite too. Take a picture for fun. You can also charge them a reasonable price to recoup their share of utilities. This would fall under the definition of “ancillary”. You wouldn’t even need to report it.

  144. The judge found gross negligence.

    Here is where I get it from:

    In the light of the evidence submitted, I find it more probable than improbable that Mr. Boulet was aware not only of his duty to report, for the 2002 taxation year, the capital gain resulting from the sale of the Residence (regardless of whether he was entitled to the principal residence exemption or not) but also of the fact that he was not entitled to that exemption in respect of the basement of the Residence because he never ordinarily inhabited that basement. Indeed, it cannot be otherwise since Mr. Boulet is too knowledgeable about real estate taxation. I am convinced that he failed to report the capital gain in order to avoid any questioning by the Minister about his occupancy of the Residence’s basement.

    The fact that the Company did not file its income tax returns for the years 2000, 2001 and 2002 (until the Minister demanded that it do so) has also convinced me that Mr. Boulet was indifferent as to whether the Act was complied with or not. Taking all these facts into consideration, I find that, in the case at bar, there was a sufficient degree of negligence to warrant the imposition of a penalty under subsection 163(2) of the Act in the amount of $12,449.

  145. I’m tired so I don’t have the energy to go too indepth with comments right now but I’ll fire off a couple short ones.

    @totoro – Two things: How did you get that he was a tax cheat? The judge actually agreed with him on all the other matters and reversed the shareholder benefit and the additional income from the company. The only point he lost on, was the principal residence exemption. And the other thing: the judge never once in his decision, refers to the size of the apartment to say it’s too big or too small or just right for the principal residence exemption. It’s only ever used as a calculation for the gain.

    @marko – I think having an internal staircase and minimizing the size of the suite would be beneficial. This could make the argument that the space is occupied by your family much stronger and believable.

    @barrister – we are of the same mind! This case focused on the fact that the unit was self-contained and not used by the homeowner, his spouse/ex-spouse or kids.

    Other thoughts: though this seems to be bad news for renting to a long-term tenant, it seems to encourage occasional renting, ie AirBnB. I mean, you can still ordinarily inhabit the unit if you only rent the space out a few weekends a month, no? Anyone see it that way, or is that wishful thinking?

  146. I don’t see any requirement for exclusive use of the suite in the decision. Where a suite is not rented, as in this case, the owner retains exclusive use and occupation rights so that seems a moot point. And the CRA bulletin specifically references space-sharing as an ancillary use not removing the exemption so exclusive use doesn’t seem to be an express requirement?

    The requirement in the case and the definition in the Act for a principal residence that it is “ordinarily inhabited” by the taxpayer who was the owner of the entire home.

    The judge in this case found that the suite, although it was not rented out and although it was used by the taxpayer’s children, it was not ordinarily inhabited by the taxpayer or his immediate family.

    I’d say this case leaves some question marks as to what you have to do to ordinarily inhabit a suite in a primary residence and retain the exemption – split your time between units? Use it as a home gym? Keep your kids there? Use by a spouse or a child under 18 is supposed to count under the Act, but here the use was, I guess, too occasional to count. That is hard to reconcile with CRA’s bulletin which states:

    Even if a person inhabits a housing unit only for a short period of time in the year, this is sufficient for the housing unit to be considered ordinarily inhabited in the year by that person.
    AND
    the housing unit must be ordinarily inhabited in the year by the taxpayer or by his or her spouse or common–law partner, former spouse or common–law partner, or child.

    It seems like a lot of emphasis was placed on the requirement to actually use the space more than occasionally which is at odds with the CRA bulletin imo. Maybe the new one will state this but if it doesn’t it seems really odd that this is what the decision would turn on.

    It appears to me that the court was looking for reasons and ways to impose penalties on this fellow because of his less than forthright manner and past dealings. I think they went too far with the ordinary use interpretation.

    In looking at the suite itself, I’m not sure if there is a difference between a partial change in use from primary residence by building a suite and a purpose built suite from the get go like there was here.

    Under the Act a partial change of use only triggers a deemed disposition if it is for an income–producing use. In this case there was no income generated nor any apparent intention to do so, although maybe it fits within income-producing use due to potential?

    If this is the case, any part of a house with structural separation that could potentially create an income generating space would fit the definition even if not used for that purpose. That home gym could be rented out too potentially so how far does the definition of income-producing go? Is intention based or potential based when no income is ever earned?

    I think it is fair to impose capital gains where the suite has been used to generate income, but where it is used to house a parent or nanny why should there be a capital gain as a result? That is creating undue hardship for families and for care of extended family members who are not included in the primary residence definition and it unduly restricts what you can do with your castle. Goes way too far and if those had been the fact of the case probably CRA would never have proceeded with the case, but now we are left with these questions.

    Also, there is already a form to report the sale of a primary residence. CRA has just had an administrative position it was not required to date on the sale of principal residence. Maybe the new form will be similar: http://www.cra-arc.gc.ca/E/pbg/tf/t2091_ind/t2091ind-15e.pdf

  147. A separate address and no internal communication is evidence that it was a suite and not part of his normal house. This was only important because there was no evidence that he had ever rented it out. If you actually have a tenant renting your suite out those two items are not at all important. Your tenant is prove that it is a suite.

    I am waiting for some to point out that in the Quebec case that it was not like Victoria rental suites because Victoria is on an island.

  148. Marko:

    With respect I dont think the two different addresses or the other factors matter. The case rests on the fact that the owner does not exclusively use the suite as his principal residence. For most suites in Victoria, if you are renting it to someone else they as a tenant have exclusive right to the suite.

    if the case has been properly summarized, and I have little doubt that it is wrong, then a self contained rental suite is clearly not a principal residence. Frankly, I believe the judges logic is impeccable and moreover follows the intent of the act which is to give an exemption to that part of a a building that one actually uses as a principal residence.

    One should note that in this case there was not even any proof that it had ever been rented to anyone else.

    Marko, you better start considering whether you are obliged to caution a vendor of a house as to whether they should advertise “that wonderful mortgage helper” in their listing.

  149. Curious Cat:

    Thank you for all the hard work. It appears the touchstone or test for this case resides that he did not have exclusive use of the apartment and did not use it to reside in. It seems to me to be clear precident regarding any self contained rental unit.

    My wife and I would be happy to have you over for a glass of wine if you are ever in the Rockland area.

  150. Thanks for the info CC!

    I think I have the same question as Ash. If we gave our tenant the boot and never rented the suite again, a deemed disposition would have occurred. Is the capital gain triggered by that transaction only playable when/if we actually sell the house?

  151. P.s. You have no idea what occupation these bloggers have. Probably not a great idea to talk about circumventing suite regulations when you could be speaking to a CRA agent. Just a thought. Ater all you may be the only one here who isn’t anonymous.

    Yes, the CRA is going to show up at my door because I disclosed on the blog that I circumvented income tax by taking time off to lower my income. Then they will take me away because I recommend people build smaller suites to circumvent as much of the suite CGs as possible.

  152. Great, you can’t even leave the suite vacant? I guess the point of the case is if you aren’t renting your suite snap a lot of photos of you partying/working out/watching a movie in your suite?

    Obvious differences between this case and 95% of homes in Vancouver and Victoria is two different addresses, no interior access, and he built the house so everything is on file via permits and easy to prove.

  153. Good find CC. Thanks for the info. If anything this shows just how much this has been a non issue to date. You had to go all the way to Quebec to find an example…and it’s a little different than most cases here since it has a separate address.

    Also, you quoted: “even if you haven’t sold your residence, you might be deemed to have sold the place in certain situations”.
    But is it true that you’d have to pay the CG before you actually sell the property?

  154. I’d say bad facts make bad law.

    This case was about a guy with a pattern of evading taxes and the judge was justifiably peeved about it and had no difficulty with finding a capital gain even where the suite had never been rented out because the guy was clearly a tax cheat and lied about many things in court.

    I think an empty suite is pointless if it leads to a capital gain. I also think stating that if you don’t use a portion of your residence ordinarily you get a capital gain is a slippery slope. What about the little old lady who can’t make it down the stairs to the finished basement that had a separate entrance and added 20 years ago for the kids when they were in university to have their own space?

    It is odd that RE and tax professionals continued to cite the less than 50% and other criteria like if you do not rent it out after this case was decided:

    The taxman has no problem if you want to use your home partly to earn income, and partly as a residence. You can still call the entire property your principal residence if you play your cards right. This is important if you hope to sell the property on a tax-free basis later. As long as you meet the following three tests you’ll be able to continue designating the entire property as your principal residence:

    1: the partial use of the residence for income-producing purposes is ancillary to the main use as a residence (i.e. beware of renting out more than half of the property);

    2: there is no structural change to the property, and

    3: capital cost allowance (CCA) – that is, depreciation for tax purposes – has not been claimed on the property.

    If you fail to meet these tests, CRA may consider all or part of your property ineligible for the principal residence exemption and you could pay some tax on a sale of the home later.

    (Wealth Management Co. the Globe 2012)

    And:

    Renting out your basement

    Many readers want to know if their home will continue to qualify for the principal residence exemption if they rent out a portion of their house. Their concern is prompted by stories of people who lost this exemption after years of renting out their basement.

    While it’s true—you can lose your principal residence exemption—it really only happens if you rent out more than 50% of your home, or when you decide to claim capital cost allowance on the portion of your home that is the rental.

    The CRA recognizes that, over time, depreciable property will become obsolete. Believe it or not, this also applies to real estate. Because of this you are well within your right to offset this loss in value by deducting the depreciation over a period of several years. This deduction is the capital cost allowance (CCA). However, if you claim CCA on your home, you are effectively telling the taxman that this property is used to produce income, and you use lose the opportunity to claim a capital gain, which is taxed much more favourably than income.

    http://www.moneysense.ca/columns/can-you-avoid-capital-gains-tax/ (realtor 2013)

    And:

    If on the other hand, the basement has a shared entrance or if the rental of the unit is periodic and sporadic, it is unlikely a change in use would be triggered.

    http://blog.taxresource.ca/capital-gains-on-a-basement-rental/ (accountant)

    How much of your home is the basement apartment? If your home is mainly a home with a small portion rented, then you can reasonably have declared it as your principal residence and have the growth tax-free while you only had a basement apartment. If it was a large portion, such as half, then Dan is right that half the gain would be a capital gain.

    http://www.milliondollarjourney.com/how-to-file-your-rental-income-taxes.htm (by Ed Rempel, CPA CMA, CFP from 2014)

    Although it seems some got it right:

    Those who rent units in their principal residence must pay capital gains on the portion being rented when the property is sold. A basement apartment that takes up 20 per cent of the square footage of a home results in a capital gain on 20 per cent of the sale price. However, if the space you are renting is not a self-contained dwelling, the capital gain will be covered by your principal residence exemption.

    http://www.givemebackmyfivebucks.com/2014/03/28/tax-advice-homeowners/ (finance blogger 2014)

    This article points out some risks going forward now that reporting a sale is mandatory:

    http://www.theglobeandmail.com/globe-investor/personal-finance/taxes/how-new-tax-changes-will-impact-every-canadian-homeowner/article32271116/

    As far as a tax ruling goes, you could do that but I’d be interested to see what the reporting form looks like first if I had a suite that could fall in a gray area. Might also be good to have Curious Cat do a post on claiming past depreciation /CCA if she is up for it. This could be advantageous for some high income suite owners to adjust their returns going back. I think most suite owners haven’t claimed CCA because of the concern over the loss of the exemption.

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