Calculating the tax on rental property sales when reno receipts are missing

Q. My son-in-law bought a rental property in 1994 but has no documentation to show how much he paid. He believes it was $140,000 plus several thousand to make it livable to rent, but he has no receipts for any of this.

He has now sold the rental property for $800,000 and in view of the sizeable capital gain he is now facing, do you think the tax department would accept a reasonable amount with no receipts for his original renos for say $20,000? Or must there be receipts? Any advice would be appreciated,


A. Hi Marla. The sale of the rental unit will trigger a capital gain for your son. The capital gain is calculated by taking the selling price of the property and subtracting the adjusted cost base (ACB) which is the sum of original cost plus the cost of additions and other expenditures such as legal fees and commissions.

The taxable portion of the gain is 50% of the actual gain. Also, if the property is jointly owned, the gain would be split between the owners according to their share of the property. CRA is being notified of all property sales and will expect to see some notification of the sale on your tax return for the year in which the sale takes place.

Your son is triggering a large capital gain and he will want to make sure his ACB is as high as possible. CRA could ask for evidence of the costs making up the ACB and so it would be prudent to find as much third-party evidence of the costs claimed in your ACB calculation as possible. A trip to the local land registry office to search the property deed will provide his purchase price.

If your son used contractors to do some of the upgrade work, they may be able to give him copies of invoices — and it’s definitely worth a try! He could recreate a list of the upgrades, go back and find out what costs were at the time he did the upgrades and create a calculated guess. If the capital gain is audited, you run the risk of a CRA auditor who denies the expenses due to lack of evidence. Alternatively, they may look at your calculations and deem them to be reasonable and accept them.

Documents such as pictures of the property (before and after shots), memos, and correspondence regarding the upgrades might be helpful in establishing that the upgrades were actually done as well as approximately what time period they were done in. I would suggest that your son pull together as much evidence as possible into a file for the property. All of this will help him put forth a case that may benefit him as well as appease the CRA.

Theresa Morley, CAP, CA is a partner with Morley Chartered Accountants in Barrie, Ont. Read her blog.


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