Duplexes are treated differently by taxman

The tax implications of converting a duplex and providing an inheritance to a non-resident were among the topics raised in the latest batch of reader letters. Here’s what they wanted to know.

Q: “My wife and I own a duplex in which we took over both addresses for our family once our tenant left. We used it as a family home for many years until recently. We have moved and will be renting out both units separately following some renovations. Now that we have moved out entirely and will be renting out the upper and lower, what can we expect in terms of tax reporting and treatment? I am thinking we can continue to defer any tax until we sell.”

A: You’re right about the tax being deferred. Nick Moraitis, partner at accounting firm FL Fuller Landau, says the way to go about this is to advise the tax departments about the change in usage through a letter attached with your 2015 income-tax returns, electing to defer the gains (under subsection 45(2) of the federal income tax act) for both the unit you converted to personal use and are now switching back to rental (Unit B) as well as for the unit you occupied the whole time (Unit A). “The election also allows you to claim the principal-residence exemption ON EITHER OF THE TWO UNITS for up to four years after vacating the property,” provided you don’t designate another principal residence in that time, Moraitis said. When the building is sold, Moraitis said you can claim the principal-residence exemption for the years you lived in Unit A and for four additional years after you move out (provided you don’t designate another property as principal residence). Even though you occupied both units, you won’t be able to claim Unit B as a principal residence unless the building was physically modified

to become a single dwelling.

Q: “I am a landed immigrant to Canada, with all my possessions here. One of my two children is a U.S. citizen now. When I die, is my estate theoretically sold at market value, with gains taxable in Canada? Is there any estate tax for the U.S. child?”

A: Unless you have a spouse, what happens at death is that all your assets are treated as if sold at fair market value, with the estate responsible for any liabilities or taxes due. The balance of the proceeds will be distributed to the heirs. Jonathan Bicher, partner at accounting firm Nexia Friedman, said the basic inheritance will not be taxable in either country, but there could be tax due on any appreciation in the value of the estate’s assets between the time of death and the time of distribution.

Q: “My son and I own a home in Montreal, where he lives with his wife, and I own a cottage as well in the Laurentians. If I gave the home to my son, would it be tax-free?”

A: According to existing rules, no. You’re only exempted from capital-gains taxes on one principal residence, and you don’t live with your son, so the exemption wouldn’t apply on your half of the home. Transferring it to him would be equivalent to a sale in the eyes of the taxman, so you’d be liable for tax on any gain in the value of your half over time. Your tax benefit comes from the cottage, which can be designated as your principal residence.