Tax Treatment of Investment Properties (Ontario)

Question:

I have a client who bought an investment property 30 years ago. It’s always been rented out. It’s a second property for them.


1. If sold, what do they pay the capital gains on? 
2. Can they gift the house to a family member? 
3. Would the family member need to pay any capital gains?

Answer:

1. The first issue is to determine whether the disposition results in ordinary income or a capital gain. If they have several investment properties, then it’s likely ordinary business income. If they have only one such property, then they will likely qualify for capital gains tax treatment.

The taxation is based on the increase in value over the 30 year period. That would be the sale price less the costs of disposition after you subtract the adjusted cost base (acb). The ACB is the original purchase price plus expenses, together with capital improvements made over the years.

Assuming that the property was depreciated over the years, that depreciation is now recaptured.

The tax impact can be lessened with a Vendor Take Back mortgage which could spread the capital gain over a period of up to 5 years.

2. Yes, but there would be a “deemed disposition” resulting in the same tax treatment noted above unless it qualifies as a “tax-free rollover” to a spouse.

3. There would be Land Transfer Taxes due on the acquisition, but the capital gains tax or the business tax (if applicable) is the responsibility of the Owner (transferor).

Brian Madigan LL.B., Broker

www.OntarioRealEstateSource.com

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