Current Developments in the Taxation of Real Estate

Transcription

1 Current Developments in the Taxation of Real Estate Kay Gray, CPA, CGA, TEP Grant Thornton LLP Bruce Sinclair, CPA, CA Blake Cassels & Graydon LLP 66 th Annual Tax Conference Vancouver 2014 Topics Foreign real estate development > Subparagraph 95(1)(a)(i) 3. Ancillary dwelling units (laneway houses) 2

2 Developer Year end 30/11 Projectco Year end 31/12 LP General Partner Project 3 > Project closes before Dec 31 > All income realized on closing > Left in LP is cash, may be loaned to Developer by LP > Avoid negative ACB 4

3 > Acquiror to purchase Projectco before Dec 31 > Price will be cash/assets in LP minus an agreed amount to reflect latent tax liability > Agreed amount will be less than latent tax > Developer will indemnify Acquiror for any liabilities in Projectco > Builder warranties, > Disclosure/marketing issues, > Tax in excess of an agreed amount 5 > Steps > Payment of a stock dividend(s) or PUC increase(s) > What is the amount of safe income? > Sale of Projectco shares to Acquiror > Consideration paid > Easy to describe but let s look at some details 6

4 > Safe income issues > Paragraph 52(3)(a) > Stub period income > VIH Logging decision > 2005 DTC 5095 (FCA) > Paragraph 55(5)(f) designations 7 > Section 34.2 > TI E5 > If subsection 34.2(2) is applicable then > Such amount is stub period safe income > Not actual stub income TI C6 > Is this a reasonable position? > Can sale take place in a taxation year when subsection 34.2(2) would not apply? > Sale in December would mean no fiscal period begins in AOC year 8

5 > Projectco shares as capital property > Distinguish from Fraser line of cases > 64 DTC 5224 (SCC) > Projectco not an alternative to sale of underlying property > PUC increase v stock dividend > Subsection 52(3) deems the cost of a stock dividend > A PUC increase under paragraph increases the ACB under paragraph 53(1)(b) 9 > These types of transactions are on CRA s radar > See Amended Notice of Appeal/Reply in British Columbia Ltd. v The Queen ( (IT)G > Two step GAAR reassessments > Restore income to Projectco > Based on abuse of loss trading provisions (sections 111, 103) > Apply section 160 as a derivative assessment against the developer > Based on section 160 being evidence of a policy to prevent non-arm s length property transfers to avoid a tax liability 10

6 Foreign Real Estate Development > Foreign real estate development > Generally, FAPI > Exceptions > 95(1) investment business > more than 5 full time employees > Subparagraph 95(1)(a)(i) 11 Foreign Real Estate Development > 5 Employees > Challenging to meet this test in single purpose development entity used for limited liability protection > Issues > Subcontractors rather than employees used > No employees > Timing of number of employees > Reduced at times of closing > Fresh start rules at beginning of year 12

7 Foreign Real Estate Development > 95(2)(a)(i) > Income deemed active if > Directly related to active business of the foreign affiliate, another foreign affiliate or partnership > Activity would not have occurred but for (EN 1995) activity of other affiliate or partnership, and > Integration - would be active income of other foreign affiliate > In Bill C-43, integration test does not apply to income that is earned by the affiliate or a partnership of which the affiliate is a member 13 Foreign Real Estate Development 95(1)(a)(i) applies LP Developer (Manager) Support services Projectco 95(1)(a)(i) N/A TI (E) Project 1 Project 2 14

8 Trending Issues for Residential Real Estate 15 ADU Ancillary Dwelling Unit Vancouver City bylaws permit up to 3 housing units on most single family lots: - the main residence - a secondary suite within the main residence, and - a laneway house, or - ADU, - coach house, - garden suite, - granny shack 16

9 Why build a laneway house? Personal use own use, or use by a relative Income-earning use long-term residential rental short-term residential rental business 17 Subdivision Most single family lots cannot be legally subdivided. Legal title remains under a single name or joint names with an undivided interest in the property. Due to zoning restrictions: > Rarely possible to sell laneway house separately from main residence > No registration of a strata agreement against title. 18

10 Principal residence ITA 54 definition tests 1. personal use 2. housing unit 3. ownership 4. ordinarily inhabited 5. designation 6. size CRA Income Tax Folio S1-F3-C2 CRA TI E5(F), Nov. 5, Is there a partial change of use? Not for personal use. How does the owner "crystallize" any tax-free gain? Can a principal residence designation be made without a disposition occurring? What are the income tax implications when the property is eventually sold? 20

11 Scenario 1: Personal use only 1985: Property purchased for $200K (land worth $50K) 2014: Assessed value is $1.6 mm (land worth $1.4 mm) 2015: Laneway house built at a cost of $400K 2020: Property sold for $2.2 mm (land worth $1.7mm) Allocation of sale proceeds attributed to land based on area (75%) Principal residence exemption on 75% of gain realized? Taxable gain due to 25% of land underlying LWH. 21 Income earning use (rental property) Change of use to a rental property a deemed disposition will arise ITA 45(1)(c)(ii) partial change of use: use regularly made of the property has decreased 100% personal use -> 75% personal use 0% income earning use -> 25% income earning use Deemed disposition of the LWH portion of the property for proceeds = 25% of FMV of the whole property 22

12 Scenario 2: Rent the LWH 1985: Property purchased for $200K (land worth $50K) 2014: Assessed value is $1.6 mm (land worth $1.4 mm) 2015: Laneway house built at a cost of $400K, and rented Assessed value is $ 2.0 mm (land worth $1.4 mm) 2020: Property sold for $2.2 mm (land worth $1.7mm) Deemed disposition and reacquisition of LWH portion of property (25%) in GST implications. 23 Scenario 3: Rent the main residence 1985: Property purchased for $200K (land worth $50K) 2014: Assessed value is $1.6 mm (land worth $1.4 mm) 2015: Laneway house built at a cost of $400K, and rented Assessed value is $ 2.0 mm (land worth $1.4 mm) 2020: Property sold for $2.2 mm (land worth $1.7mm) Deemed disposition and reacquisition of MR portion of property (75%) in No GST implications (provided long-term rental) 24

13 Other considerations 1. Short-term residential rental use 2. Election to deem "no change of use" available? 3. Conversion of LWH from rental property back to personal-use property income tax implications? 4. GST implications 25 Take-away Tax traps for the unwary. Potential pitfalls: a) Inability to maximize principal residence exemption b) Potential for taxation on change of use c) GST self-assessment required if owner-builder of rental property 26