Capital Gains, Change of Use and Why an Appraisal Helps

Most homeowners only think about the value of their home when they buy, sell or refinance. But some life changes can make market value important for tax purposes even when no sale takes place. Converting your home to a rental, moving into a property you previously rented out, transferring property to a family member or making a gift can all raise questions about fair market value. This article explains, in general terms, why an appraisal can help.

A clear caution first: Canadian income tax rules are complex and depend on individual circumstances. Nothing here is tax advice. Speak to a qualified accountant or tax lawyer before acting. Our role is to provide the independent value they may need.

Fair market value in tax

Canadian tax rules often rely on fair market value: the price a property would sell for in an open market between willing, informed parties dealing at arm's length. When a transaction or event is deemed to occur at fair market value, someone has to establish what that value was. An independent appraisal is one of the most reliable ways to do so.

Situations where value may matter

Changing a home to a rental

If you move out of your home and start renting it out, the change in use may be treated as a disposition at fair market value for tax purposes, subject to elections and rules your accountant can explain. A documented value as of the date of the change can matter years later when the property is eventually sold.

Moving into a former rental

The reverse situation, moving into a property that was previously rented, can also involve a change in use and a valuation date.

Transfers to family

Selling or gifting property to a child or other family member may be treated differently from an arm's-length sale. If the price is below market value, tax consequences may differ from what the parties expect. An appraisal documents what market value actually was.

Adding someone to title

Adding a child or partner to the title of a property can have tax and legal implications. Value as of the date of the change may be relevant.

Estates

On death, property is generally treated as disposed of at fair market value. See our article on estate appraisals.

Why a documented value matters later

Tax questions often arise years after the event. If the Canada Revenue Agency reviews a return, or a property is sold long after a change in use, the taxpayer may need to support the value used. A report prepared near the relevant date, by an independent appraiser, with comparable sales from that period, is much stronger evidence than an estimate made after the fact or a figure from an assessment notice.

Retrospective appraisals

If the relevant date has already passed, a retrospective appraisal can still be prepared. The appraiser analyses sales from around that date and considers the property's condition at the time. Photographs, listing details or records of renovations help establish what the property was like.

Principal residence questions

The principal residence exemption is a major part of Canadian tax planning for homeowners. How it applies to your situation, particularly where a property has been both a home and a rental, or where there is more than one property, is a question for your accountant. A clear record of value at key dates helps them give accurate advice.

Working with your accountant

Before ordering, ask your accountant or lawyer:

• what date the value needs to be as of
• whether the value is for a specific filing or election
• whether land and building values need to be separated
• who the report should be addressed to

Some tax situations require an allocation between land and building, for example when calculating depreciation on a rental property. Tell us if you need that so the report includes it.

Rental and investment properties

For investors, values at the time of acquisition, change in use and disposition all feed into tax calculations. An appraisal at each key point can simplify record-keeping and reduce disputes later.

A cottage-country and city example

Consider a Winnipeg couple who lived in a house in River Heights for years, then bought a newer home in Bridgwater and kept the River Heights house as a rental. Their accountant asks for the market value of the River Heights house as of the month they moved out, because that is when its use changed. A retrospective appraisal using sales from that period, and photographs of the home at the time, gives the accountant a documented value to work with. When the couple eventually sell the rental, years later, that record helps support their tax filing.

Keeping good records

Whatever your situation, good records make tax matters easier. Keep purchase documents, receipts for major improvements, appraisals at key dates, and notes about when the property's use changed. These records help your accountant calculate any gain accurately and support the figures if they are ever questioned.

Tax-related appraisals in Manitoba

Burley Appraisals prepares current and retrospective appraisals for tax and accounting purposes across Winnipeg and Southern Manitoba. We work with homeowners, accountants and lawyers. Order online and choose "Tax or accounting", or call to discuss the dates involved.

Frequently asked questions

This article is general information, not legal, tax or financial advice. Speak with a qualified professional about your situation.