rary CAR TST Seer] 56 - Wednesday, June 5, 1991 - North Shore News Revenue Canada examines motives behind purchase THE BEST profit is a non-taxable one. Yet if you aren’t careful, Revenue Canada can sometimes surprise you by insisting on a share of your gain. The most common tax-free profit (or capital gain) is the one you make when you sell your principal residence. If you make, say $40,000 when you seli your home, you get to keep all $40,000. (Note that you can keep your home as your principal residence for up to four years even if you move away and rent out the place. The four-year rule is waived if your employer transfers you as long as you move back before selling. Of course, you can have only one principal residence at a time. For more details, ask Revenue Canada for its Interpretation Bulletin 1T-120R3 Principal Resi- dence and Form 12091 Designa- tion of a Principal Residence.) However, if you make money by regularly buying a home, fixing it up and selling it, Revenue Canada might consider that you are in business and tax your prof- its as full income. The same ap- plies if you buy a place in a rising market with the intention of flipp- ing it (reselling it shortly to make a profit). In these cases you would be able to deduct your costs of doing business. But you'd have to declare your profit as income rather than a capital gain, which means it would be fully taxed. So if you do buy an old place to fix up with the idea that you could sell it and, because it’s your principal residence, pay no tax on your profit, do so on an irregular basis. When you do sell, make it clear you are motivated by non-finan- cial reasons: yeu want to move 1o a beiter neighborhood, your home is now too small (or too big), commuting is a problem, it’s too noisy, and so on. For regular investments, the capital gains exemption allows you to make a profit of up to $100,000, on your investments and pay little or no tax. (If you sell a family farm or share of a quali- WV student ~ WEST VANCOUVER resident Sarah Morgan, a Grade ft student at Crofton House Schoo! in Van- couver, has won an award in the 12th annual Secondary Schools Essay contest’ sponsored by the Greater Vancouver Regional District (GVRD). She took one of six $150 merit awards for students in Grades 11 and 12 for an essay on the aging population and what i meas 10 Michael Grenby DOLLARS AND SENSE fying small business, the exemp- tion is $500,000). Let’s say you make a profit of $80,000 when you sell some reve- nue property or securitizs. You can then claim $80,000 of your $100,000 capital gains exemption and probably pay no tax, (Because three-quarters of all capital gains are taxable, you first declare a $60,000 taxable capital gain. You then claim an offsetting $70,000 of your $75,000 taxable capital gains exemption — that $75,000 being three-quarters of the $100,000 capital gains exemp- tion. (Whenever you itave a capital gain like this, always check the CNIL and AMT — cumulative net investment loss and alternative minimum tax-7vles. These could cause you to pay tax as a result of declaring a capital gain, although sometimes you can take steps to avoid or at least minimize this tax.) When you buy and sell revenue property, you must be careful or Revenue Canada could decide to tax as full income any capital gain you claimed tax-free under the ex- wins award the region. She also received a hard-cover book and a certificate. There were over 200° entries from 30 different schools and the awards were presented by Van- couver Mayor Gordon Campbell, chairman of the GVRD. The essays were judged by a panel of six that included four GVRD directors, including West ancouver Mayor Mark Saget. SERVICE PLUS PEMBERTON PLAZA POSTAL OUTLET $9399 OFF POSTAGE STAMPS When you purchase 100x40¢ stamps Coupon expires June 30/91 1268 Marine Dr., N.Van. 983-2032 | (Beside Save-On-Foods} COUPON REQUIRED FOR THIS OFFER emption. Even if you have used up your capital gains exemption, you would declare only three-quarters of the gain as taxable — still a better deal than having the entire gain taxed as income. The key: buy the revenue prop- erty to earn revenue, rather than to resell for a profit. It helps to have an investment plan that shows projected future rental in- come, your plans to muximize in- come, minimize expenses and so on. This is # particulariy important because many revenue properties Operate at a loss, at least in the early years. Revenue Canada tends to look more closely at the speculator than at the investor. The speculator takes out the maximum morteyage possible. The expenses, mainly the mortgage in- terest, far exceed the rental in- come. The then deducts these losses from the income, reducing tax. The speculator hopes the value of the property will go up more than his after-tax losses so he ends up with a good profit when he sells. Revenue Canada would tend to tax a speculator's profits as in- come rather than as a capital gain. The investor, on the other speculator hand, wants to earn income from the revenue property, even if there are ‘startup’? losses. If, when the property is sold, there is a capital gain, the investor considers that 4 bonus, not the main reason for buying the property. In this case, Revenue Canada is more likely ta treat the profit as a capital gain. not as full income. Copyright 1991 Mike Grenby is a Vancouver- based columnist: and independent financial adviser who works with individuals; he will answer your questions as space allows in his column — v rite to him c/o North Shore News, 1139 Lonsdate, North Vancouver, V7M 2H4. i ee @ LEGAL FEE PACKAGE Gulf and Fraser is offering a residential mortgage “Legal Fee Package” exclusive to our members. NO TRANSFER FEE Gulf and Fraser has a “No Transfer Fee” policy for transferring your residential mortgage to Gulf and Fraser Fishermen’s Credit Union from any other financial institution. @ PRE-PAYMENT FLEXIBILITY We make it possible to pay off your mort- gage sooner and save vou thousands of ollars. Weekly, bi-weekly along with semi-monthly and monthly payment schedules are available to you. 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