How do I pay the least amount of capital gains tax in Ontario?

Question

Hi BP community!

I'm looking for professional advice from an accountant or tax specialist on how to minimize capital gains tax on a somewhat complicated triplex deal that I purchased 2 years ago in Windsor, Ontario.

Here are the approximate numbers:

Purchase Price: $170,000

Downpayment: $43,000 (borrowed by refinancing a principle residence)

Mortgage: $127,000 (held in a self-directed RRSP with TD Bank)

Capital Improvements: $70,000

Annual Rental Income: $39,600 + utilities

Target Sale Price (after realtor fees and legal cost): $330,000

I am looking at reinvesting the entire $203,000 into a mid-sized apartment building. My question is how do I minimize the tax paid on this $90,000 gain? Is there a program that is similar to the 1021 exchange in the United States for Ontario? I've also got 3 other partners on this particular deal that are not on title (it's in my personal name), and we are splitting the profits. Can I write that off as an expense so that I only pay tax on my portion of the $90,000 gain ($22,500)?

Any advice in this area for this particular deal and on tax-savings strategies in Ontario would be much appreciated, thanks!

Nick Thompson · Answer

@Matt Andrews if the property is held in your own personal name and not in a holding corp then it is dificult to shelter the capital gains.  In Canada we cannot defer our tax payments like in the USA (which is what a 1041 exchange does).

For us in Canada the first step is to make sure you have put all expences against the property as possible.  Then you have to take the gains.  Only 50% of capital gains are taxable so $45,000 in your case.  If you have a second name on the title you can split the capital gains.  My wife makes less then I do so I  always ensure she is on title.  This way we each see a $22,500 income from capital gains.  This amount will then be taxed at your current tax bracket.

If you find a better way to do this please let me know.

Roy N. · Answer

@Matt Andrews

Capital gains taxation is federal, so any strategies for mitigation of taxes due are more broadly applicable than Ontario ... though individual provinces have their own pile-on taxation on the portion of gain included in your income.

Though immaterial to the taxation, I presume the mortgage is being held in an SDRSP to which an arms-length third-party is the beneficiary?

Have you been claiming CCA on the property?  If so, there will be a recapture in the year of sale.

If you carry the note on the property when you sell, you can defer your capital gains over 5-years ... but this does not fit your plan to use the proceeds now.

If you have off-paper partners, the entire gain, and any CCA recapture, will be attributed to you ... you can always ask them to make you whole afterward (again, off paper).

Are you able to control your other income (defer it) so as to lower your overall income in the year of sale?

Elizabeth Wilson · Answer

@Matt Andrews - Im not going to be much help either except to tell you how important it is to have a good CPA on your team.

They have simply made taking money from me too complicated for me to figure out without paying an expert.

Happy to pay our CPA for his expertise on saving me money and keeping me out of jail.

Best of luck!

Lee Jackson · Answer

Hi Matt,     That's a good question, I am in a very similar situation.

Sorry I don't have an answer for you, I would love to find out though.

From anything I have been told / learned.   You only pay tax on 50% of your gain...  so I am only guessing, but you would only pay tax on half of your $90k...    unless you lived in the property for a period of time, within the last so many years...

And unfortunately I do not believe that there is a Canadian version of the 1021 exchange.

Not much help here...

Matt Andrews · Answer

@Roy N.

Excellent, thanks again for all your insight and help Roy!

Roy N. · Answer

@Matt Andrews

I'm surprised you were able to have the mortgage held in your SDRSP.   Technically when you sell, the money to retire the mortgage will go back into your SDRSP and will not be available to re-invest in your next property.

In that case, if your SDRSP is capable of holding the entire mortgage of the buyer ... or if the buyer finds another lender for the balance and you are willing/able to hold the current outstanding mount as either a second or in pari passu, you might simply replace your non-arms length mortgage with an arms-length mortgage and have your registered account continue to be the bank.   The only catch would likely need to move your SDRSP - or a portion of it - to another trust service provider as TD no longer provides that service.

Other than continuing to hold a mortgage inside your registered account, there is no real tax benefit to refinancing before you sell.   If refinancing will allow you to withdraw capital to invest elsewhere, that could be a benefit.

Matt Andrews · Answer

Hi Roy,

I don't live in this property, it was purchased as an investment. I appreciate the advice on the SDRSP, I'm finding that to be true.

Would there be any tax benefit to refinancing the property (and using the proceeds to invest in another property) prior to selling the first place?

Roy N. · Answer

Matt,

Do you live in the property or purchased it as a second home?  In addition to non-arms length mortgages from your SDRSP generally being a bad idea fiscally, a registered plan, to which you are a beneficiary, cannot hold a mortgage on a property in which you have an interest, with the exception of your residence (and a couple of other specific situations}.

The maximum deferral of capital gains when you carry is five years ... you will typically absorb 20% of the gain each year.

Matt Andrews · Answer

Thanks everyone for the feedback!@Roy N.

Yes the mortgage is in a SDRSP (non-arms length) and have been claiming CCA.

Deferring income, that's genius! I'll talk to my investing partners and see what we can arrange for that. I'm guessing that however long we hold the note for (VTB) is the length of time we can spread the gains over?I may be able to differ other income, or purchase some equipment to offset the gain, but haven't done that before so I'll check with an accountant to make sure I do it right.

John Sauber · Answer

Good question... I'd be curious to know if there's a better way too. I have a few friends in Ontario interested in investing.

How do I pay the least amount of capital gains tax in Ontario?

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