Accountant said you could avoid capital gain tax on rental property if buying another property with the proceeds?

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Jul 24th, 2021 4:26 am

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Jul 22nd, 2021 12:49 pm

Tinattle [OP]: Newbie; Dec 3, 2017; 88 posts; 10 upvotes; Hamilton

Jul 22nd, 2021 12:49 pm

Accountant said you could avoid capital gain tax on rental property if buying another property with the proceeds?

Hello all the experienced RE investors,

I have a question regarding a situation that my MIL is in now and hopefully you guys can help me shed some light.

So my MIL has been living in her primary residence (A) in Hamilton since 2011. She bought a new build in Niagara Falls (B) in 2018 and rented it out. In 2020, she sold B and put all the capital gain realized from B as a down payment on another new build in Niagara Falls (C). Immediately after, she moved into C to live and rented out A.

To what I understand, my MIL would have to declare capital gain realized from B on her 2020 tax return. But her longtime accountant advised her that she didn’t need to because she used all the profits from B to acquire C. I kept telling my MIL that it wasn’t what I have learnt from Canada website and all tax forums, but she insisted to trust her accountant after confirming with him couples time.

So, is the account right? Is there an exception for capital gain tax, that if you use the proceeds to buy another property, that I didn’t know of?

Thanks in advance for any insight.

22 replies

Jul 22nd, 2021 1:17 pm

blackmoon2408: Newbie; Apr 14, 2021; 14 posts; 14 upvotes

Jul 22nd, 2021 1:17 pm

I am a CPA and I don't think your accountant is correct if your mother lives in Ontario. Your mother hold all properties under her personal name so she needs to pay capital gain taxes on B. In 2020 tax return she may also need to say she sells A to herself when she changed the purpose from primary to rented (no tax to pay on selling A to herself cause it was primary but the price will decide how much she pay on capital gain taxes later date when selling A). It she is filling US taxes, it will be another story. US has certain provision to defer capital gain taxes but proper paperwork needs to be followed.

+4

Jul 22nd, 2021 2:18 pm

ssj4_ootaku: Sr. Member; May 12, 2003; 983 posts; 376 upvotes

Jul 22nd, 2021 2:18 pm

Get a new accountant

+8

Jul 22nd, 2021 2:21 pm

licenced: Deal Fanatic; Jul 3, 2011; 6517 posts; 3793 upvotes; Thornhill

Jul 22nd, 2021 2:21 pm

Hasn't been that way in over a decade.

+1

Jul 22nd, 2021 2:33 pm

skeet50: Deal Fanatic; Jan 15, 2017; 5442 posts; 5644 upvotes; Ottawa

Jul 22nd, 2021 2:33 pm

Either ask the Accountant to provide you with the links that support this and/or get a second opinion from another Accountant. Personally, I would seek out a second opinion.

Remember that even if your MIL's Accountant is making a mistake your MIL will still be held liable.

+1

Jul 22nd, 2021 2:43 pm

DaveTheDude: Deal Addict; Mar 3, 2018; 3151 posts; 3520 upvotes; GTA

Jul 22nd, 2021 2:43 pm

The accountant is confusing IRS tax code which does allow replacement property with Canadian tax law.

+1

Jul 22nd, 2021 3:14 pm

Newuserid: Deal Addict; Jan 5, 2020; 1067 posts; 1534 upvotes

Jul 22nd, 2021 3:14 pm

Your accountant is wrong.

Based on the information you provided, property B was a rental property that was sold. If there was a capital gain on this sale, you will have to pay tax on it. It doesn't matter what was done with the proceeds from the sale.

+1

Jul 22nd, 2021 4:57 pm

Tinattle [OP]: Newbie; Dec 3, 2017; 88 posts; 10 upvotes; Hamilton

Jul 22nd, 2021 4:57 pm

blackmoon2408 wrote: ↑ I am a CPA and I don't think your accountant is correct if your mother lives in Ontario. Your mother hold all properties under her personal name so she needs to pay capital gain taxes on B. In 2020 tax return she may also need to say she sells A to herself when she changed the purpose from primary to rented (no tax to pay on selling A to herself cause it was primary but the price will decide how much she pay on capital gain taxes later date when selling A). It she is filling US taxes, it will be another story. US has certain provision to defer capital gain taxes but proper paperwork needs to be followed.

Yes, she is in Ontario. I also asked her about deemed disposition of A when she rented it out which her accountant didn’t seem to care about at all so she obviously didn’t file it on her 2020 either.

I’m just worry about future consequences. I mean you never know if CRA will randomly pick up your file for an audit right

Hopefully she will listen to me and seek for advice from another accountant regarding this matter.

Jul 22nd, 2021 5:10 pm

Tinattle [OP]: Newbie; Dec 3, 2017; 88 posts; 10 upvotes; Hamilton

Jul 22nd, 2021 5:10 pm

skeet50 wrote: ↑ Either ask the Accountant to provide you with the links that support this and/or get a second opinion from another Accountant. Personally, I would seek out a second opinion.

Remember that even if your MIL's Accountant is making a mistake your MIL will still be held liable.

So I urged her to call the accountant again today about the capital gain. He insisted what he said was right, and if my mom wanted to pay capital gain tax then go ahead and find another accountant that would adjust the return for her.

Like what?? Lol

On top of that, when he filed my MIL’s 2020 return, he said she would have a refund of $450, but then she got her NOA yesterday showing a balance of almost $5k. And just by a quick look over I could already tell what errors the accountant did on the return comparing to the NOA.

I mean, he’s a senior account (in his 70s) and has been in business for a longggggg time. Maybe it’s time for him to get updated with new tax rules or to retire.

Jul 22nd, 2021 5:12 pm

senasena: Deal Addict; Feb 19, 2019; 1971 posts; 3097 upvotes; Stouffville ON

Jul 22nd, 2021 5:12 pm

Tinattle wrote: ↑ Yes, she is in Ontario. I also asked her about deemed disposition of A when she rented it out which her accountant didn’t seem to care about at all so she obviously didn’t file it on her 2020 either.

The potential penalties for not reporting the deemed disposition of principal residence are $100 per month up to a total of $8K.

There are either significant misunderstandings between you/your MIL and the accountant, or there are significant screwups happening.
Or both.

Full Time and Full Service Realtor

Jul 22nd, 2021 5:20 pm

DaveTheDude: Deal Addict; Mar 3, 2018; 3151 posts; 3520 upvotes; GTA

Jul 22nd, 2021 5:20 pm

Tinattle wrote: ↑ Yes, she is in Ontario. I also asked her about deemed disposition of A when she rented it out which her accountant didn’t seem to care about at all so she obviously didn’t file it on her 2020 either.

Yes since 2016 she also has a deemed disposition on property A that needs to be reported in her tax return. The principal residence exemption needs to be claimed in order to nullify any capital gains tax from that deemed disposition. Otherwise CRA potentially can deny or apply a penalty to allow the exemption later if not reported.

Jul 22nd, 2021 5:22 pm

senasena: Deal Addict; Feb 19, 2019; 1971 posts; 3097 upvotes; Stouffville ON

Jul 22nd, 2021 5:22 pm

I believe there is a confusion about the replacement property rule which still exists in Canada as far as I know, but it doesn't apply to this scenario.
https://www.canada.ca/en/revenue-agency ... perty.html

General overview of the replacement property rules
1.1 Where a capital property, other than a share of the capital stock of a corporation, is disposed of, whether voluntarily or involuntarily, and a replacement property is acquired within specified time limits, subsection 44(1) may provide for the deferral of all or part of the capital gain on the disposition.

1.2 Similarly, all or part of the recapture of CCA on the disposition of a property described in ¶1.3 that is depreciable property of a prescribed class may be deferred by virtue of subsection 13(4) where a replacement property is acquired within the specified time limits.

1.3 Unless otherwise specified, a reference in this Chapter to a former property applies to any property disposed of in either of the situations described below:

when subject of an involuntary disposition: a property where the proceeds of disposition (POD) received by the taxpayer consist of compensation for property unlawfully taken (for example, stolen), compensation for property destroyed including any amount of insurance proceeds payable in respect of that loss or destruction, compensation for property taken under statutory authority (for example, expropriated) or the sale price of property sold to a person by whom notice of an intention to take it under statutory authority was given. These types of POD are as described in paragraphs (b), (c), or (d) of the respective definitions of POD in subsection 13(21) or in section 54; or
when subject of a voluntary disposition: a property that was, immediately before the disposition, a former business property of the taxpayer. This expression former business property is discussed in ¶1.27 to 1.32.

Normally when such questions are asked on the forum I suggest to speak to your accountant.
In this case I suggest speaking to a different accountant.

Full Time and Full Service Realtor

+3

Jul 22nd, 2021 5:37 pm

DaveTheDude: Deal Addict; Mar 3, 2018; 3151 posts; 3520 upvotes; GTA

Jul 22nd, 2021 5:37 pm

senasena wrote: ↑ I believe there is a confusion about the replacement property rule which still exists in Canada as far as I know, but it doesn't apply to this scenario.
https://www.canada.ca/en/revenue-agency ... perty.html

Yes unlike the US the replacement property rules only kick in for involuntary dispositions like expropriation in Canada.

Jul 22nd, 2021 7:48 pm

skeet50: Deal Fanatic; Jan 15, 2017; 5442 posts; 5644 upvotes; Ottawa

Jul 22nd, 2021 7:48 pm

Tinattle wrote: ↑ So I urged her to call the accountant again today about the capital gain. He insisted what he said was right, and if my mom wanted to pay capital gain tax then go ahead and find another accountant that would adjust the return for her.

Like what?? Lol

On top of that, when he filed my MIL’s 2020 return, he said she would have a refund of $450, but then she got her NOA yesterday showing a balance of almost $5k. And just by a quick look over I could already tell what errors the accountant did on the return comparing to the NOA.

I mean, he’s a senior account (in his 70s) and has been in business for a longggggg time. Maybe it’s time for him to get updated with new tax rules or to retire.

It makes no sense whatsoever for your MIL to pay any one, let alone an Accountant, to prepare her tax returns with errors in them. Don't spend another second on this guy. Find your MIL a new Accountant.

+1

Jul 22nd, 2021 9:07 pm

SargeJ: Member; Jan 16, 2021; 339 posts; 155 upvotes

Jul 22nd, 2021 9:07 pm

Tinattle wrote: ↑ So I urged her to call the accountant again today about the capital gain. He insisted what he said was right, and if my mom wanted to pay capital gain tax then go ahead and find another accountant that would adjust the return for her.

Like what?? Lol

On top of that, when he filed my MIL’s 2020 return, he said she would have a refund of $450, but then she got her NOA yesterday showing a balance of almost $5k. And just by a quick look over I could already tell what errors the accountant did on the return comparing to the NOA.

I mean, he’s a senior account (in his 70s) and has been in business for a longggggg time. Maybe it’s time for him to get updated with new tax rules or to retire.

Which accounting licence does he have? This sounds like a pretty straight forward tax rule...

+1

Jul 22nd, 2021 9:54 pm

Jon Lai: Deal Expert; May 30, 2005; 48262 posts; 9157 upvotes; Richmond Hill

Jul 22nd, 2021 9:54 pm

He must think USA took over Canada...

Tons of things for sale!
Silver Coins and Numismatics | Hardwood cutting boards, dining tables, home decor, and more | Heatware

Jul 23rd, 2021 12:17 am

realtorhome: Sr. Member; May 3, 2013; 754 posts; 458 upvotes; Toronto

Jul 23rd, 2021 12:17 am

Do accountants have error & omissions insurance? If I hired this accountant, sold a rental and bought another, paid no taxed cuz my accountant filed my taxes, what happens if I do get audited next year and found to owe taxes? Any E&O to cover that?

+1

Jul 23rd, 2021 2:52 pm

sircheersa: Deal Guru; Feb 22, 2011; 14084 posts; 18007 upvotes; Toronto

Jul 23rd, 2021 2:52 pm

realtorhome wrote: ↑ Do accountants have error & omissions insurance? If I hired this accountant, sold a rental and bought another, paid no taxed cuz my accountant filed my taxes, what happens if I do get audited next year and found to owe taxes? Any E&O to cover that?

I don't think they would need it. If your accountant makes a mistake and you end up owing taxes then you are SOL and have no recourse against the accountant. You couldn't even sue for losses because it's not a loss, you are just paying what you were supposed to from the start.

Jul 23rd, 2021 2:55 pm

kangarooz: Deal Addict; Apr 12, 2013; 2924 posts; 1907 upvotes; Moon

Jul 23rd, 2021 2:55 pm

Tell your accountant to double check to see which side of niagara falls he is on, no 1031 here.

Koodo, Public Mobile, Lucky Mobile Customer

Jul 23rd, 2021 6:40 pm

licenced: Deal Fanatic; Jul 3, 2011; 6517 posts; 3793 upvotes; Thornhill

Jul 23rd, 2021 6:40 pm

sircheersa wrote: ↑ I don't think they would need it. If your accountant makes a mistake and you end up owing taxes then you are SOL and have no recourse against the accountant. You couldn't even sue for losses because it's not a loss, you are just paying what you were supposed to from the start.

They do have it and even if they didn't they can be sued - it's a fiduciary duty profession.

+2

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