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  • Nov 10th, 2013 6:53 am
[OP]
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Nov 13, 2005
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Tax question....

Initial Purchase price: $700,000.00
Investment property selling price:$1,000,000
Down payment by the purchaser: $500,000
Seller gives Vendor Take Back Mortgage: $500,000 @ 10% for 5 yrs (simple interest not compounded, just to keep it simple)

What are the tax implications here. Let's assume that the sale is considered a Capital Gain and not business income. What is the Capital Gain and how is the Yearly interest income treated.

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sunnybono wrote:
Nov 9th, 2013 5:34 pm
Initial Purchase price: $700,000.00
Investment property selling price:$1,000,000
Down payment by the purchaser: $500,000
Seller gives Vendor Take Back Mortgage: $500,000 @ 10% for 5 yrs (simple interest not compounded, just to keep it simple)
$300k capital gain -- immediately incurred, at 50% inclusion rate.

$50k/year income, taxed just like income.

*However*, an assumption to be made is that the above is not a related party transaction. If such a transaction is between related parties, then there's obviously a giant problem with such, especially the above-market rate on financing for the mortgage. Since, of course, no rational buyer, in today's interest rate environment, would agree to a 10%/year mortgage with 50% LTV.
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Oct 16th, 2012 9:06 pm
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$150000 cap gain recognized immediately.

$150000 cap gain recognized $30000 year over 5 years.
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Actually its even more complicated than what I wrote above, because CCA probably has been claimed against the investment property by the current owner, which would be subject to recapture.
TodayHello wrote:
Oct 16th, 2012 9:06 pm
...The Banks are smarter than you - they have floors full of people whose job it is to read Mark77 posts...
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dutchca wrote:
Nov 9th, 2013 5:47 pm
$150000 cap gain recognized immediately.

$150000 cap gain recognized $30000 year over 5 years.
^^^ wouldn't you have to structure the transaction in a certain way to achieve the "capital gains reserve"? As opposed to an outright 100% sale?
TodayHello wrote:
Oct 16th, 2012 9:06 pm
...The Banks are smarter than you - they have floors full of people whose job it is to read Mark77 posts...
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It depends

If CRA determines that you're in the business of buying and selling investment property, then the gain is 100% income

If they agree that it's not income, but capital gain, then i believe the capital gains reserve rules would apply as well, where the gain is recognized over time

http://www.cra-arc.gc.ca/E/pub/tg/t4037 ... P402_37907

Mark's second pt re: recapture will also apply if CCA was taken
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Mark77 wrote:
Nov 9th, 2013 5:50 pm
^^^ wouldn't you have to structure the transaction in a certain way to achieve the "capital gains reserve"? As opposed to an outright 100% sale?
No, dont think so. Usually just based on the cash collection. Im somewhat rusty on the reserve rules though.
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dutchca wrote:
Nov 9th, 2013 5:59 pm
No, dont think so. Usually just based on the cash collection. Im somewhat rusty on the reserve rules though.
Yeah, seems to me in this case that the property is being paid in full, ie: the $500k cash + the $500k mortgage pledged in favour of the seller. As opposed to a contract for a sale of equity over 5 years, which is obviously a more optimal structure from a tax point of view. AFAIK, one isn't entitled to take the reserve behaviour simply because they are a debt financier of a property that they sold.
TodayHello wrote:
Oct 16th, 2012 9:06 pm
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cap gain reserve as someone alluded to, may be applicable. its laid out in the tax act, the EXACT calculation. no need to guess, someone can just quote the calc. (the max reserve results in 1/5 of the gain included in income per year).

Interest income is interest income.

hey Mark ..sell a property for 500k gain, vendor mortgaged, no cash down, minimal payments .... how do you pay your (high rate) tax on the entire gain? what does COMMON SENSE tell you? and what do you think the point of a reserve is?
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kaycee8877 wrote:
Nov 10th, 2013 6:30 am
hey Mark ..sell a property for 500k gain, vendor mortgaged, no cash down, minimal payments .... how do you pay your (high rate) tax on the entire gain? what does COMMON SENSE tell you? and what do you think the point of a reserve is?
kaycee8877, the transaction would have to be structured explicitly with the reserve. Not simply an outright one-time sale with a mortgage pledged in favour of the seller, and repayment against the mortgage obligation. There is a difference.

Any qualified RE lawyer and/or RE tax professional should be able to help the OP to structure such a transaction properly if taking advantage of capital gains deferral by way of a reserve is the desired outcome. It is likely more optimal to increase the capital gain and "finance" the rest of the property at a lower interest rate to the seller, rather than receive a very high interest rate. Of course, if its a related party transaction, then there is no choice in the matter -- must be done at fair market value. Actually anything that's not FMV, related party or not, is open for dispute by the CRA. So 10% financing is highly problematic to say the least.

The 5-year "reserve" rule allows two parties to fix the transaction's price up-front, rather than to gradually transfer a percentage of equity, and be forced to evaluate the FMV of the equity each year. Of course, it is possible to sell the property on an even longer timeframe (ie: 5% a year for the next 20 years, for instance), but the FMV must be computed at the time of each transaction and be defensible to the CRA.
TodayHello wrote:
Oct 16th, 2012 9:06 pm
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mark, do you know what a reserve is? do you explicitly know what legal requirements are necessary to 'enact' a reserve?

type as much as you want, but i have a feeling you have ZERO experience in the area. A vendor mortgage is the MOST BASIC and MOST COMMON reserve possible. the reserve is implicit in the fact there is a mortgage...it common sense as i already said

edit - here's how to calc - http://www.taxtips.ca/filing/capgainresother.htm

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