Adjusted Cost Base

[grace yeung]

I bought a condo in 2013 for $300,000. I paid the full amount but put ownership 50/50 with my son who was then 17 years old. My son lived in the condo in 2017, then rented the condo from out from 2018 to 2020. Now my son wants to live in the condo again and buy my 50percent share. What will be my ACB?

[TheTaxSmith]

Hi grace yeung. Your ACB (Adjusted Cost Base) for the condo will not change due to your son's ownership so it is the simpler of the two situations. Basically your ACB would normally start with 50% of the total of $300,000 plus legal fees, title insurance, transfer taxes, etc. at the time of purchase. Then you add 50% of any capital renovations (not repairs) paid directly or through condo special assessments over the years until your son gets your 50% transferred to him. But because you paid 100% for all, and you can document that, then your ACB could be at 100%. You will need to have your son sign a letter stating that he did not pay any of those capital costs.

Now when the condo was rented out you may have claimed CCA (depreciation) so you will now have a UCC balance (undepreciated capital cost) which is lower than the ACB. Upon transfer/sale to your son you will need to get a Fair Market Valuation (FMV) from an independent appraiser. This will establish the actual Proceeds or transfer/sale. The FMV is required as the transfer/sale is to a related individual. You will now have a capital gain of an amount of the Proceeds less the ACB determined as mentioned above, plus a Recapture (Income) of an amount equal to the ACB less the UCC. A Terminal Loss (where the FMV is less than the UCC) upon transfer will more than likely be denied as the property will be deemed personal use property by virtue of your son living there.

It does not matter what amount if any your son actually pays you. Only the FMV matters unless of course you use a value higher than the FMV for transfer/sale, but that gets into other problems.

Alternately since your son's name is on the deed at 50% and you and your son agree you could have an ACB, the Proceeds due to FMV, and the UCC all at 50%. Your son may have an issue with Recapture and a Capital Gain (due to rental years) under this situation.

 

 

[grace yeung]

Thank you very much for your prompt reply. I have retired with no income except the rent from the condo. My son has income from employment. How will buying my 50 percent affect his income?  The FMV of the condo is about $500,000 now, does he have to report capital gain if he buy my 50 percent?

[TheTaxSmith]

If your son purchases your share of the condo and moves in he will have a change in use from rental to principal residence. It will affect his income only to the extent of Recapture as at the transfer date. When he disposes of it later he will have a capital gain for the years it was rented out. For the years from purchase to the first rental year the condo would likely be his principal residence. Then after the rental years stopped it again would be his principal residence.

You would however have a capital gain and possible recapture as at the transfer date.

That said however for the years that it was rented it does not necessarily mean it was not his principal residence. If on the other hand he claimed CCA against rental income he would have a gain and recapture for those years.

I suggest you look over the following:

https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-127-capital-gains/principal-residence-other-real-estate/changes-use.html

 

[grace yeung]

thank you very much, really appreciate your kindness.