Tax Tip:   Rental Property

On August 31, 2010, CRA had advised the taxpayer that his income tax return for the 2007 year was under review and that he was required to provide information and documents concerning a rental property sold in 2007.

The taxpayer had disposed of the rental property for $285,000. CRA included this amount on the 2007 Personal Tax Return but reduced the Adjusted Cost Base (ACB) claimed by the taxpayer by the estimated $52,810 of renovation expenses which the taxpayer had added.

The dispute was settled in a July 3, 2013 Tax Court of Canada case. The taxpayer could not provide any corroborating evidence of the renovation costs, therefore, the Court did not accept this as part of the ACB.

The taxpayer referred to the expiration of six years as being the time for which he had to keep receipts.

CRA successfully argued that this six years commences after the year to which the costs relate. Therefore, costs which become part of the ACB of the property must be maintained for six years after the property is disposed, not six years after the costs are incurred.

Related to the above, in a June 14, 2013 Technical Interpretation, CRA noted that permanent documents must be kept for a period ending two years following the dissolution of the corporation and the general documents must be kept for a period ending six years following the last year for which they relate, unless the corporation is dissolved, in which case the period ends two years following the dissolution of the corporation.

It should be noted that, at the Tax Court, the onus is on the taxpayer to prove the CRA is wrong, not the other way around. “Innocent until proven guilty” is a principal of criminal law, and most tax disputes are not criminal in nature.

Action Item: Don't throw out the receipts for improvements to property! Keep them separate from regular expense receipts.