It’s construction season in the Kootenays! And you are thinking about (or starting to build) a shop on your personal property for your business. Maybe you’re a construction contractor or you sell artwork.
This means it’s time to talk tax. In very basic terms, changing the way you use your real property (or a portion of that property) from personal to business, or vice versa, may have an immediate, and a long term impact on your tax situation.
Let’s run through 2 very general, but common scenarios.
Scenario 1
Building a shop on property you claim as your principal residence, and claiming a portion of your ongoing property expenses as home office expenses.
The CRA notes that “when there is a change in use of a property you have, you may be considered to have sold all or part of your property even though you did not actually sell it.” The following are some sample situations provided:
- You change all or part of your principal residence to a rental or business operation
- You change your rental or business operation to a principal residence
“Every time you change the use of a property, you are considered to have sold the property at its fair market value and have immediately reacquired the property for the same amount. You have to report the resulting capital gain or loss (in certain situations) in the year the change of use occurs.
If the property was your principal residence for any year you owned it before you changed its use, you do not have to pay tax on any gain that relates to those years. You only have to report the gain that relates to the years your home was not your principal residence.”
As always, there are exceptions to the rule, as well as elections that taxpayers can submit to address this issue.
However, the CRA may deem that you did not have a “change of use” to your property if:
- your rental or business use of the property is relatively small in relation to its use as your principal residence
- you do not make any structural changes to the property to make it more suitable for rental or business purposes
- you do not deduct any CCA (depreciation) on the part you are using for rental or business purposes
You can see how there is space for some interpretation here and that carefully considering the portion of property expenses attributed to your business can be an important tax decision.
Scenario 2
Building a shop on property you claim as your principal residence and then claiming all the related expenses for that project as business expenses.
As outlined above, if you make a structural change to your property, the CRA can deem a “change in use” for your property. This means you should very carefully consider if you want to claim a new building as a business asset/expense.
Activities that mix personal and business use should be considered two components of one overall tax plan.
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Cedar Creek CPA 