Don’t be too quick to pay Mr. Harper, our columnist says.
Q: Last month, I sold a house that was a rental for the past six years. The closing is on Oct. 31, 2007. If I buy another home within the six-month period, will I be exempt from capital gains tax?
— Dan, Toronto
A: There have been some proposals and discussions on the topic by our federal finance minister to defer the tax on sale of capital assets such as stocks and real estate, aside from the existing rules. Briefly, if passed, the tax on capital gains for disposition of investment assets such as stocks and real estate can be postponed if a replacement investment was reacquired within a six-month period. This would be great for investors, particularly popular for stimulating investments in the stock and real-estate markets. No bill has been passed; Therefore, all transactions are subject to the current tax rules.
Business owners and real-estate investors risk substantial monetary investments and dedicate many years of sweat and sacrifice to build a business or a real-estate portfolio. Individuals should not so quickly give funds to Mr. Harper that can be postponed or deferred to a much later date.
The tax on capital gains may be deferred on certain business assets. The disposition of business assets may be postponed provided a replacement of business asset is acquired for the same or similar purpose before the end of the first taxation year following the sale. A fast-food restaurant that sells its business assets and reacquires another fast food restaurant may qualify for the tax deferral provided it is done within the year of the initial sale.
A: deferral of tax for capital gains on real estate may qualify under special conditions such as:
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If the real estate were business assets, then tax can be deferred provided a replacement is purchased within the first taxation year.
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A partial sale of the property.
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A vendor take back mortgage.
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An involuntary sale, such as the expropriation or destruction of the property. In this instance, a replacement property must be acquired by the second taxation year.
The sale of assets can be complex and a highly specialized area of tax. Investors of real estate or business owners should speak to an accountant that regularly works with these types of transactions.
Henry Choo Chong, CGA provides professional accounting and taxation solutions for individuals, businesses and corporations. Henry can be reached at 416-590-1728, ext. 304. E-mail all questions to Money Matters choochonghcga@yahoo.ca.
