Capital Suite

The topic of a rental suite in your house possibly triggering capital gains tax when sold has been covered extensively on this site (here and here and here).  In short, normally you don’t pay capital gains tax when selling a principal residence, but a self-contained suite of significant size may mean that capital gains is due on the suite portion of the home.    So far the writing from CRA and several articles indicate this is the case, but we’ve also heard that several local accountants have dismissed the concerns especially when the suite is small in relation to the whole house.   It certainly seems that the more self-contained the suite is and the larger it is relative to the property, the greater the chance it could trigger capital gains.   As always, ask a professional about your personal situation.

Even if capital gains tax applies due to your suite, what would be the impact?   Would the capital gains tax completely destroy the profit from the suite, making it better to buy a house without a suite?  To follow up on this, reader CuriousCat (who dug up the original information on this change) went through the calculations and produced a spreadsheet comparing two scenarios.   Here is CuriousCat’s analysis (edits for presentation in this blog):

What if you compare two buyers, both purchased a house for $800,000 and sold for $1,200,000, 5 years later? They both put 20% down, the only difference being that one buyer did not rent out a suite, while the other rented it for $1400/mth.

The point of the tax system, as we keep being reminded by the feds, is that they want it to be fair (an incorporated doctor should pay the same amount of taxes as a non-incorporated doctor, etc.)  So is it? Who comes out ahead? The buyer without the suite, or the one with the suite who is forced to pay all his taxes on the rental income and capital gains?

First we have the purchase of the two properties

Then we need to operate them for 5 years and calculate the total cash we have to put into them consisting of the mortgage payment and down payment, minus rent collected.

Then we sell both properties for $1.2M.

After 5 years, the landlord is ahead by $84,000.   But we haven’t paid any taxes yet.   If capital gains applies:

Then the landlord’s profit drops to $44,000.   And if the landlord reported his rental income every year (and writes off the relevant expenses):

In conclusion, even when paying capital gains and all income taxes, with very strong appreciation in a property, the landlord remains ahead by $36,640 for the 5 year period.    Of course we know most people don’t pay all their taxes (especially the capital gains), so then they come out ahead quite a lot.   You can access the spreadsheet here and change the numbers for your own analysis.

My Take:  Thanks to CuriousCat for preparing this.  While the impact of the capital gains is large if it applies, it would appear that it still makes financial sense to rent out a suite rather than leave it empty.  In times of slower price appreciation than the example, the impact would also be significantly less.

The other way to look at it of course is that the capital gains + income tax on the rental in the example combined to create a 56% tax rate.  That might be hard to swallow regardless of final outcome.

The basement walls are crying

Thanks to CuriousCat for this guest post :

“If I were to buy a home today, I would walk around the home to see if there are visible plastic drain clean outs that can be accessed and have the drains checked before buying. If they are not present then I would think that eventually new drainage will have to be installed. The cost of excavating, removing concrete walks around the home’s perimeter and installing new drainage is enormous and I think a rip-off of consumers.” – John Dollar

When we bought our 1940 house, there were white PVC clean-outs around the perimeter of the home and the inspector told us that the drainage system was updated within the last 5 years. The owners stated that they had never had any moisture in the home during the 3 years they’d owned it. The house is on a slope atop of clay. They indicated on the disclosure statement that there were no moisture issues.

Two years later during a major rainfall in December it was as if someone turned on a tap behind the foundation wall. The basement was unfinished but we still had carpets, furniture, TV, and computers in the southern half, and the water was coming in through the northern wall so there was a bit of a buffer and a chance to “save” our possessions.  A lot of water was running along these channels on the perimeter of the foundation (like a concrete moat) but it was overflowing. It was about 10pm when we saw the water and using a shopvac we battled the deluge all night, getting up every 20 mins to empty the vacuum.   The water didn’t stop coming until it stopped raining, at about 8am the next morning.   That same night a neighbour had her entire basement flooded and had to go through insurance to have her furnace replaced.  We hoped it was a one-time thing, but then it happened again two years later.

Things that should have tipped us off:

  1. The concrete foundation walls and floor were painted, likely in an effort to hide water damage.
  2. The rubber interlocking tiles that the previous homeowner had left behind and we had just put our stuff over top, had this white chalky mineral under them, covering signs of efflorescence.
  3. The old carpet that had been put over a carpet pad, directly over the concrete, was moldy. We hadn’t checked under these when we had moved in.

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Challenging times

This is a guest post by valued contributor CuriousCat.  Her previous work was the dissection of the new CRA rules on suites.  Huge thanks to CuriousCat for this post:

In this environment of low inventory, the average house hunter may find themselves looking at, considering and even purchasing a “less than perfect” house. What can you live with it? How do you address these challenges? Perhaps you didn’t even realize this WAS an issue until you moved in because you are a first-time homebuyer, or you are from out-of-town and homes here are just different than what you are used to, or you had to make a quick decision in order to secure the house. This is the first of a series of posts I’m hoping to write that will address different challenges that I have come across, being a first-time homeowner of a 1939 pre-wartime house in Saanich West.


In a perfect world, everyone would own a home on a quiet cul-de-sac where children play street hockey on the road with plenty of on-street parking. You may drive by a house on Bay Street, or McKenzie and think to yourself, who would ever live there? I would never! But people do and during our house hunting journey, we seriously considered 3801 Quadra Street I really liked this house. It had large rooms, a floorplan that flowed and made a lot of sense, and a flat deck in the backyard right off the dining room. I was picturing where the furniture would go as I was walking through it. The fact that it was on Quadra, a busy street, was definitely a concern, but dismissed as being a minor inconvenience without too much thought. In the end, we did not purchase this house because of the price, not because of the location.

This would be a pretty lame post if it was about a theoretical purchase I never made.  We DID end up purchasing a very similar house in the 300 block of Gorge Rd West. So here is the reality of owning a home on a busy street.

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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:

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A History of On Reserve Housing

This is a guest post by Dr. Sylvia Olsen.  I recently attended a talk organized by Civil Engineering students at UVIc on the topic of housing on First Nations reserves in Canada.   Before this, my only knowledge of on-reserve housing came from driving by on the highway and noticing the poor state of it, as well as the occasional news story that bubbles through the noise.  Listening to Sylvia’s passionate and insightful summary of her PhD research opened my eyes to the root causes of the current crisis and the appalling history of the system that created it.    

While outside the normal topic of discussion on this blog, I believe this is an issue we should all be more educated about and I strongly encourage you to take the time to watch the video of Sylvia’s talk below.  It really puts the housing issues we are all bombarded with every day into perspective.

Dr. Sylvia Olsen presents a paper on her PhD dissertation titled “Making Poverty: A history of government housing programs on reserves, 1930-1996.”

Sylvia currently teaches on-reserve housing management at Vancouver Island University. She has lived on Tsartlip First Nation for most of her adult life; her children and grandchildren continue to live in the community. She has worked in the field of on-reserve housing for decades in many capacities from housing and construction management, to curriculum development and policy analysis. Sylvia believes there are two fundamental principles involved in finding solutions to any problem: first, you must understand the problem and second, the intensity of the solution must match the intensity of the problem. Her work enables Canadians to understand on-reserve housing in a new way. Her hope is that it will help shift public impressions and influence policy going forward.

Making Poverty on Vimeo