The Canada Revenue Agency (CRA) has certain rules and guidelines to be followed in case of property transactions and in certain instances a property appraisal is needed to be done to make sure that all the rules of Canadian taxes are followed. Be it capital gains reporting, property transfer, or any other reason, knowing when and why the CRA needs an appraisal may help property owners and investors avoid tax-related problems. This paper discusses the conditions when the CRA might need a property appraisal and why it is necessary.
What is the CRA’s Role in Property Transactions?
The CRA has the mandate of ensuring that property owners and investors adhere to the Canadian tax laws of property transactions. These legislations involve charging on capital gains, the taxation implication of transferring properties, and proper valuation of properties. In some cases, the CRA may demand that an independent property valuation is done to find out the fair market value (FMV) of a property to calculate tax liability.
Situations Where the CRA Requires a Property Appraisal
Capital Gains Tax Reporting
Among the most common scenarios in which the CRA might demand a property appraisal, there is a case when you are obliged to report capital gains taxes. The CRA requires that, in the event that a property is sold, inherited or otherwise disposed of, that you report the sale, and any capital gains or losses. To calculate this accurately, an appraisal may be necessary.
Selling Property: In the case that you sell a property, the CRA will need you to report the selling price and calculate whether there is a capital gain. In case the property has increased in value since the time you bought it, such an increase is taxable.
Transferring Property: In certain situations where you give property to a relative or even another party, there is a need to have an appraisal done in order to establish the FMV of the property to pay taxes. This is particularly crucial in the event that there is no market-based sale price.
Changing the Use of Property
The CRA takes the change of use of property as a considered disposition, i.e., in tax terms, you are deemed to have sold the property at its fair market value (FMV) and then repurchased it at the same value. This is usually the case when one is transforming a property into either a rental property or a personal property.
Principal Residence to Rental Property: In the event that you switch the use of a property, which was a principal residence to a rental property, then an appraisal is necessary to ascertain the FMV of the property at the time of such change of use. This is essential in computing the possible capital gains tax of the deemed disposition.
Rental Property to Principal Residence: Likewise, when you convert a rental property to a principal residence, an appraisal will be required to ascertain the FMV of the property at the conversion time so as to be compliant with the tax rules.
Estate and Inheritance Planning
In the case of the death of a person giving property to heirs, the CRA mandates an appraisal to be carried out to ascertain the FMV of the property at the time of death. This valuation is applied to compute any taxes that may be paid on the estate and the capital gains tax that will be paid when the property is eventually sold by the heirs.
Calculating Capital Gains on Inherited Property: In the case of inherited properties, the CRA uses the FMV at the date of death as cost basis of the property. In case the property is sold later, the capital gain calculated by deducting the FMV at the time of inheritance and the sale price is taxable.
Gift of Property
In case you give a property to a person, whether it is a family member or a charitable organization, the CRA demands that you report the FMV of the property at the time of the transfer. Although there is no money involved, the CRA still regards this as a transfer and the gift may be treated as a capital gain or loss. To determine the FMV of the property correctly, an appraisal is essential to report to the tax.
Gift of Property to Family Members: In the case of gift of property to a family member, e.g. a child, CRA would expect the FMV at the date of transfer to be used to calculate any capital gains that are to be taxed. This also applies to property donations made to charities.
Property Tax Assessments
The CRA sometimes might necessitate an appraisal to dispute the tax assessment of a property. In case a property owner feels that the municipality has over-valued his property in property tax calculations, he or she can demand an independent appraisal to dispute the assessment.
Challenging Property Taxes: In case the property value according to the municipal assessor exceeds the market value, an appraisal can be applied to prove your argument in the case of a property tax challenge.
For Non-Market Transactions
In some other situations CRA might demand an appraisal where no exchange of money is involved like in the case of property transactions between family members, divorces, or corporate restructurings. In such instances, it is required that an independent appraisal should be conducted to determine the FMV which may determine tax liability, such as capital gains and other tax-related aspects.