Question about capital gains taxes

[Fire of the Phoenix]

Hi all, I was wondering if anyone here could help me out with a question I have, any help would be greatly appreciated.

The story goes as follows: My wife and I put our house on the market last May, and were finally able to get an offer in September. We haggled on price and settled. In the 2 week period before closing my wife and I ramped up our efforts to find a new house obviously, and we found one that we absolutely fell in love with. Unfortunately the deal for selling our house fell through. Some repairs needed to do be done before the bank would finance. Unfortunately the interested buyer walked away because they needed a place yesterday. We said screw it, we want our dream home anyway, we decided just fix up the old place, turn it into a rental for a few years and sell it later. That was the plan.

Fast forward 2 months and the repairs are almost done. We were literally just about to rent it out and, even though my old house is off the market, I have another interested party that was going to make an offer around the same time, but were told we had an accepted offer. They find out that it fell through and are now interested. This person really, really wants the house, repairs are basically done her financing apparently is all good. This could potentially be awesome but there's potentially a porcupine at my balloon party: capital gains tax.

I knew I would be paying taxes down the road once I did sell it, but I was counting on a few years of rental income to balance it out. However, we have now been living in our new place for like 2 months. My question is: Am I going to get hit with CGT? My old house was my primary for 7 years, it hardly seems fair that I would because I didn't get the sale/purchase didn't go down at the same time. I have tried researching this online but I'm not sure, some of the stuff I've read seems contradictory. If I have to pay right now, it could cost me over $20000, which will kill the deal. Next step I guess is too get in touch with an accountant, but I'm really hoping there's a tax wizard on here that can help me out....

[Canehdianman]

From my recollection, you have a year grace period when you sell a house. I.e. if you lived in it for 5 years and rented for one, then you won't have any tax.

Someone smarter who has dealt with this more recently can confirm/deny.

[red sky]

Not an accountant but yes, you have a year grace period so no capital gains tax.

[takinghits]

http://www.cra-arc.gc.ca/tx/ndvdls/t.../menu-eng.html

Provides good information.

"Every time you change the use of a property, you are considered to have sold the property at its fair market value and to have immediately reacquired the property for the same amount. You have to report the resulting capital gain or loss (in certain situations) in the year the change of use occurs."

If this all happened during fiscal 2014 then you can argue the FMV did not alter significantly over those few months where you had two houses.

[Calgary14]

Here is a full writeup (with examples) on the topic:
http://www.ourbigfatwallet.com/how-t...emption-works/

[Fire of the Phoenix]

Thanks everyone (especially for the links) I knew I could count on CP, lots to go on

[Winsor_Pilates]

Talk to a good accountant as it's not cut and dry.
I just covered this in a real estate tax class about 2 weeks ago and there is a lot of very close variables.
Your intent plays a very big part in things, and if it had remained to simply sell your primary residence and move into the new one, I'm pretty sure you'd be fine.
As others have mentioned, you have a 1 year cushion to taking possession of your new place before closing your old place so that isn't an issue in itself.

Where you may have an issue is that you changed your intent to make it a rental property and if CRA could prove this you would likely need to pay tax.
It's a good thing you actually have not rented it out though, as it would be hard to prove your intent changed at any point (aside from this CP thread). I would stop letting people know that part of the story until you've confirmed things with a good accountant.

[red sky]

Yeah but even if was considered a deemed sale it would be based on fair market value two months ago, no? There really wouldn't be any CGT. Again not an accountant so this may not be correct.

[robaur]

There is no capital gains tax as per the facts in your original post.

The residence was never rented out thus there is no rental income.

As the residence was your primary residence and falls under the grace period then that is also another reason why there is no capital gains tax.

Just sell your house and be done with it. Nothing to worry about here.

There was no "change of use" here.

[mrkajz44]

Agreed with robaur based on the facts - I consider this a non-issue and no tax should arise.