Urgent Input required on capital gains tax on sale of apt building

[TangoWhiskey]

Are capital gains taxes calculated on net proceeds of sale after mortgage repayment or on gross proceeds without taking into account mortgage repayment?



Ex - 20 unit building sold for 1.5 million. Older owner who has depreciated the building to 0 $ cost base over the years, but has mortgage of 800K.



Does Revenue Canada calculate his capital gains as 1 500 000 times 0.5 = 750K taxable capital gains or as 1 500 000 minus 800 000 = 700 000 times 0.5 = 350K capital gains.



I'm working on options to present to an owner next week but my accountant has gone away til then and I can't get a hold of him.



thanks

 

[Thomas Beyer]

Capital gains gain on value PLUS higher tax on depreciation re-capture ! So if he bought for $500,000, (say $50,000 land value and $450,000 for building) he pays capital gains taxes on $1M plus 45% or so on the $450,000 he used to depreciate to zero. (45% is used as an example, it depends on province .. But it is twice the capital gains tax as it is deemed "passive" income and not even active business income )

 

[Pheenix]

Don't forget in thinking about your offer that there are ways to spread the gain over several years. there are two or three ways to do this, each with pros and cons.



Get good professional advice on this before moving beyond the conceptual stage.



Brad

 

[TangoWhiskey]

Brad - Can you give the quick version of the two or three different ways to spread the gains - I only know of the vendor take back 2nd mortgage way. Thks



Thomas - so the two tax components in this scenario are capital gains on 1 mill value between 1.5 and 0.5 cost (or the marginal rate on 50 % of these) plus a recapture of depreciation also at the marginal rate of that province?

 

[Thomas Beyer]

Yes. Exit options with tax deferral : Agreement for sale, JV and lease with option to purchase. A VTB usually does not allow tax deferral as the VTB is a receivable (or loan) thus treated like an all cash gain on a sale from an accounting point of view.