capital gains tax

[gregg]

Hi,

I am looking for information regarding capital gains tax in Canada. If for example someone sells me a property and takes back the mortgage and we agree to terms over five years etc. when does the capital gains have to be paid by the seller? Thanks

Greg

 

[DonCampbell]

Hi Greg,

When a vendor carrys back a mortgage they have the option to `elect` a defferal of the capital gains tax due on the portion they carry back. They can take this election up to 5 years (therefor a good pitch to a vendor is a 5 year VTB) They then spread the tax due over these 5 years (rather than pay it all immediately).

This mortgage can be registered on title to help protect the vendor`s position.

 

[Anonymous]

Thats a great selling feature Don!

In addition, I would always recommend speaking with a good accountant who is familiar with Real Estate transactions and have them draft the letter which explains this so you have an alternative "authority" on the mater who can explain this for your.

 

[George]

Good morning Greg,

Don is absolutely correct regarding the capital gains reserve. Be careful though that the sale qualifies for the this reserve. A variety of sales are regulated to a shorter 3 year reserve. There are some catches that typically are not an issue, but occassionally spring up. Provided that you recommend that they discuss the reserve with their accountant, I believe you`ll be on the side of the angels. The reserves do not eliminate the tax as you likely know, but merely spread the tax out over time, often with a heavier push towards the end of the reserve period.

Warm regards...

George

 

[gregg]

Thank you Don and Mark.

I have taken your advice and contacted a knowledgeable accountant and found that the vendor could elect to deffer a portion of the Capital Gains depending on how much they have depreciated the property over the years. Also, they would have to use a mortgage reserve approach. I am not quite sure about this so I will have the accountant give me the information in writing. Do you know anything about the reserve mortgage issue?
Thanks for leading me in the right direction.

Greg

 

[George]

Good evening Greg,

I expect that your accountant and you are talking about the same thing but using different terminology. The "mortgage reserve" is used to calculate the amount of the capital gains deferal that the vendor may be eligible for. Effectively, the larger the vtb, the more that can be deferred. For tax purposes, technically we don`t defer a capital gain but rather take a reserve which offsets the capital gain. Each following year we bring the prior year reserve into income and then take a new reserve until the reserve runs out.

Warm regards...