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4 – GERARD RATCHFORD: SENIOR WITH FOREIGN INCOME & PRE CALCULATIONS

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Gerard Ratchford — Senior’s return with two property sales: the complete, beginner-friendly knowledge base for tax preparers 🧾🏡🌍

Quick orientation: this guide walks you step-by-step through everything a preparer needs to analyze, calculate and enter Gerard’s (a 67-year-old senior) situation into tax software (Intuit ProFile). It covers pensions & RRIFs, a UK dividend with foreign withholding, a rental property sale with prior CCA claims (and the resulting recapture), and the sale of a principal residence (with an earlier cottage sale that already used up some years of PR designation). Use the checklists, boxed notes and the ProFile walkthroughs while you practise.

At-a-glance summary 🔍

  • Client: 67, widowed, retired (income from CPP, OAS, RRIF withdrawals).
  • Transactions this year: sold a rental property (previously claimed CCA); sold principal residence and intends to claim the principal residence exemption; foreign dividend from UK (with UK withholding tax).
  • Key issues to resolve: RRIF minimums and reporting; calculate capital gain on rental sale, determine any CCA recapture and terminal loss; confirm principal residence exemption (PRE) eligibility given earlier cottage sale; translate foreign income/withholding into CAD and claim a foreign tax credit where appropriate; enter everything correctly in ProFile.

1) Pension & RRIF income — what to know and how to report 🧓💵

Concepts:

  • CPP & OAS are pension income and reported on their respective slips (CPP = CPP statement / T4A?; OAS = T4A(OAS) or similar).
  • RRIF distributions are reported on a T4RIF slip. The slip shows the amount received in the year — include the full amount as income.
  • RRIF minimum: federally there is a legislated minimum percentage after conversion; withdrawals above the minimum are fully taxable (and must be reported).
  • Seniors may be eligible to split eligible pension income with a spouse (pension income splitting) — useful if spouse exists and it lowers combined tax. As the client is widowed, splitting won’t apply here but keep in mind for other clients.

Practical steps to compute & verify:

  • Collect T4A(OAS), CPP statement, and T4RIF slips. Use the amounts shown on the slips — do not guess.
  • If client took more than the RRIF minimum, report the full amount; if taxed at source incorrectly, note for adjustment.
  • Check whether any pension income credit or age credit applies (age credit available subject to income thresholds).

✅ Note: OAS clawback can apply at higher incomes — always verify net income to determine if OAS recovery tax (clawback) applies.

2) Foreign dividend (UK) — grossing, withholding, conversion & foreign tax credit 🌍💷➡️CAD

Concepts:

  • Foreign dividends (UK) are taxable in Canada as foreign income — report the gross dividend (before foreign withholding) converted to CAD.
  • If foreign tax was withheld (UK withheld 25% in Gerard’s case), the taxpayer may be eligible for a foreign tax credit (FTC) in Canada to avoid double taxation (Form T2209 calculation).
  • Use either the actual exchange rate on the date of receipt, or an accepted rate (Bank of Canada daily rate or yearly average if using yearly amounts). Document the rate used.

How to calculate (step example using Gerard’s numbers):

  1. UK gross dividend: £6,250.
  2. UK withholding tax remitted: £1,562.50 (25% assumed).
  3. Net received: £4,687.50 (this is what landed in his account).
  4. Convert both the gross dividend and the foreign tax withheld to CAD using the chosen FX rate (document which rate).
    • Example: if the rate on date of receipt = 1.7 CAD/GBP, then Gross CAD = 6,250 × 1.7 = $10,625 CAD; foreign tax CAD = 1,562.50 × 1.7 = $2,656.25 CAD.
  5. Report gross CAD amount as foreign income; then compute FTC on T2209 using the foreign tax CAD amount. The FTC is limited to the Canadian tax attributable to that foreign income — software computes the limiting calculation.

Practical rules & tips:

  • Always keep source documents (foreign slip or company letter, proof of withholding).
  • If the foreign payer issued a net-of-tax payment, still try to obtain documentation of the gross amount and tax withheld — CRA expects gross amounts.
  • Use the FX rate choice consistently; record it in workpapers.

3) Rental property sale — CCA history ⇒ UCC, recapture & capital gain 🏚️➡️💰

Concepts explained simply:

  • When a rental property had CCA (capital cost allowance) claimed in prior years, the Undepreciated Capital Cost (UCC) is reduced.
  • On disposition (sale), two separate calculations occur:
    1. Recapture of CCA (if proceeds exceed UCC but are less than original cost): recapture is included in income (fully taxable as income).
    2. Terminal loss (if proceeds < UCC and asset class terminated) — deductible (rare in buildings).
    3. Capital gain on land portion or on the property overall is calculated as: Proceeds of disposition − Adjusted Cost Base (ACB) − Selling expenses = Capital gain. Half of the capital gain (50%) is taxable as taxable capital gain.
  • Important: For buildings/structures split between capital cost and land, CCA applies to the building portion, land is not depreciable and contributes to capital gain.

Step-by-step approach (what you must do):

  1. Gather the sale documentation: sale price, selling costs (commissions), sale date. Example: sale price = $675,000.
  2. Pull prior years’ CCA records and compute UCC at the start of the year and at time of sale (the UCC provided in files is the figure to reconcile). Example UCC end of 2021 ≈ $394,008.87 (use exact file numbers).
  3. Determine ACB (original purchase price + improvements − any cost recoveries). If prior CCA claimed, ensure ACB was correctly recorded.
  4. Calculate recapture: if proceeds allocated to capital cost class (generally building portion) exceed UCC, recapture = lesser of (proceeds allocated to class − UCC) and amount of prior CCA claimed; include recapture on income (Form T776 / income inclusion area).
  5. Calculate capital gain: determine portion attributable to land + any capital gain on sold property after subtracting ACB and selling costs. Report 50% of the capital gain as taxable.

Red flags & notes:

  • Many preparers forget to allocate sale proceeds between land and building — do this carefully because land yields capital gains (no CCA) and building interacts with UCC/recapture.
  • Maintain evidence of past CCA claims — recapture can be significant if lots of depreciation was claimed over the years.

4) Principal residence exemption (PRE) — rules & the effect of prior cottage sale 🏡🛟

Core rule (simple):

  • A taxpayer may designate one property per family unit as a principal residence for each year it was owned, which can exempt all or part of the capital gain for those years. The exemption is calculated with the formula:
    Exempt portion = Capital gain × ((years designated + 1) / years owned).
    (The “+1” is the “plus one year rule” CRA allows — remember to include it.)

Important interaction here:

  • Gerard sold a cottage in 2016 and the file shows years 2014, 2015, 2016 were allocated to that cottage on the T2091 filed in 2016 (which avoided capital gains then). Since those years were already used to designate the cottage as the principal residence, you cannot double-designate the same years for another property. That reduces the years available to designate the later principal residence. That may cause part of the current home sale gain to be taxable.

Steps to determine whether PRE fully applies now:

  1. Determine years of ownership for the principal residence (the property just sold).
  2. Count the number of years already used for a different property (cottage years used = 2014–2016). Those years cannot be re-used.
  3. Apply the PRE formula using only the years you can designate for the sold house. If the result doesn’t eliminate the entire gain, report the taxable portion (Schedule 3 / T2091 entries).

Practical tip: always confirm whether the taxpayer designated the cottage as the principal residence on the earlier return (pull the filed T2091 or client evidence) — the file you have suggests it was already designated.

5) Combining the rental disposition, PRE, and foreign income — workflow checklist ✅

  1. Confirm identity, personal info, and residency status for the tax year.
  2. Enter all slips first: T4A(OAS), CPP slips, T4RIF, T5 (if interest), T3/T5 for investment income (if any), and foreign dividend documentation.
  3. Enter foreign dividend: gross amount, foreign tax withheld, exchange rate used. Document the source.
  4. Enter rental income module (prior years’ CCA and UCC). In the disposition screen input sale price, selling costs, and proceed allocation (land/building). Let software compute recapture and capital gain — verify the figures manually.
  5. Enter principal residence sale on Schedule 3 and complete T2091 (designation) to claim PRE for eligible years; account for previously designated years for the cottage.
  6. Run the foreign tax credit calculation (T2209) and ensure FTC is applied correctly (software will compute the limit).
  7. Review for OAS clawback and for tax on RRIF over-withdrawal.
  8. Prepare workpapers showing calculations, FX rates, and copies of foreign documents and property sale closing statements.

6) How to enter everything in Intuit ProFile — step-by-step (for absolute beginners) 🖥️🧭

These are practical, beginner-level ProFile steps. Menu names can vary slightly by version — the flow and screens described below are what you should look for.

A. Start the client file

  1. Open ProFile → Create new client (or open existing client). Fill basic demographics (name, DOB, marital status: widowed), social insurance number, and address.
  2. Set tax year and residency status.

B. Enter slips (CPP, OAS, RRIF, T5 etc.)

  1. In the client workspace, go to Slips (or the “T-slips” area).
  2. Choose the slip type: e.g., T4A(OAS) or T4A for OAS, CPP (or enter CPP amounts where ProFile asks for CPP), T4RIF for RRIF.
  3. Enter the boxes exactly as shown on the client slips. Save each slip.
  4. For other investment income (interest, T5 dividends), go to T5/T3 slip entry and input amounts.

C. Enter foreign dividend & withholding

  1. In ProFile navigate to Other Income → Foreign Income / Other foreign amounts (sometimes under “Other Information” or a dedicated “Foreign” menu).
  2. Create a new foreign income entry: enter country (United Kingdom), type (dividend), gross amount in foreign currency (£6,250), foreign tax withheld (£1,562.50) and the date of receipt.
  3. Enter the exchange rate used (e.g., 1.70). ProFile will convert foreign amounts into CAD when you save.
  4. Verify that ProFile populates the foreign tax credit worksheet (T2209) — check the T2209 form within ProFile to ensure the foreign tax credit was calculated and applied. If needed, adjust the FX rate or documentation.

D. Enter rental property income and disposition (CCA/recapture)

  1. In ProFile go to Rental / Business (T776 module for rental). Create or open the rental property workpaper.
  2. Enter the rental income and expenses for the year (lines for rent received, management, repair, mortgage interest etc.).
  3. Locate the CCA tab within the rental module. Enter prior years’ CCA history: opening UCC (e.g., $394,008.87) and class information (class for building, class for furniture if applicable). Ensure the UCC brought forward matches your workpapers.
  4. For the disposition: find the disposition area in the rental module, click New disposition, enter sale date, proceeds of disposition ($675,000), selling costs, and allocate proceeds between land and building.
  5. Save — ProFile will calculate any recapture (which will flow to income) and the capital gain (which will flow to Schedule 3). Review the calculated recapture value on the rental summary and confirm it matches your manual calculation.
  6. If the UCC becomes zero and the class is closed, ProFile will also show any terminal loss (rare with buildings).

E. Enter principal residence sale & T2091 designation

  1. Open Schedule 3 (Capital Gains) in ProFile. Add a new disposition line for the principal residence. Enter: date sold, proceeds, A C B, and selling costs.
  2. ProFile should prompt you about principal residence — it will open the T2091 section. Complete the T2091 form: indicate the years of ownership and the years you wish to designate for PRE.
  3. IMPORTANT: In the T2091, do not include years already designated to the cottage (2014–2016). Only designate the allowable years for the current property. ProFile will calculate the exempt portion and carry the taxable portion to Schedule 3.
  4. Save and check the Schedule 3 totals and the T1 summary to ensure capital gains/taxable portion flow correctly.

F. Run foreign tax credit and review

  1. Go to Forms and open T2209 (Federal Foreign Tax Credit) — verify ProFile pulled the foreign tax paid in CAD.
  2. Review the limit calculation to ensure the FTC is not exceeding the allowable limit. ProFile usually computes the allowable limit automatically but always verify.

G. Final checks & produce T1

  1. Use ProFile’s diagnostics / validation tool to find missing slips or inconsistencies.
  2. Run Tax Summary and check for: OAS clawback (if applicable), CPP/OAS reporting, RRIF amounts, recapture included in income, taxable capital gains, and the foreign tax credit.
  3. Print or e-file as required. Save workpapers (FX calculations, property closing statements, foreign receipts, and CCA history) into the client file.

✅ ProFile practical tip: Always attach the scanned or PDF source documents to the client file in ProFile (slips, closings, foreign documentation). This saves re-work and is essential if CRA requests verification.

7) Worked examples — simplified numeric walkthroughs (illustrative) ✏️

These examples are illustrative. Use the client’s exact numbers from their closing statements and slips when preparing the return.

A — Foreign dividend (example)

  • UK gross dividend: £6,250
  • UK tax withheld: £1,562.50
  • FX rate used: 1.70 CAD/GBP
  • Gross CAD income reported = 6,250 × 1.70 = $10,625 CAD
  • Foreign tax credit base (CAD) = 1,562.50 × 1.70 = $2,656.25 CAD
  • Enter gross CAD on income line; enter foreign tax on T2209; ProFile computes the allowable credit.

B — Rental sale & CCA recapture (illustrative)

  • Sale proceeds: $675,000
  • UCC before sale: $394,008.87 (building class UCC)
  • Proceeds allocated to building portion (for recapture) e.g., $473,000 (as per file allocation)
  • Recapture = lesser of (proceeds allocated to class − UCC) and prior CCA claimed. If proceeds allocated to building = $473,000 and UCC = $394,008.87 ⇒ recapture ≈ $78,991.13 (this becomes ordinary income).
  • Separately calculate capital gain on land: Proceeds allocated to land, less ACB of land, less selling costs ⇒ gain; report 50% as taxable.

⚠️ Warning: the allocation between land and building materially changes recapture and capital gain. Use closing statements (often show land vs building breakdown) or a professional appraisal if uncertain.

8) Documentation & workpaper checklist (must-have) 📂✔️

  • All T-slips (T4A(OAS), T4RIF, CPP statements, T5/T3 etc.).
  • RRIF contract documentation (if needed).
  • Rental property: acquisition documents, past CCA schedules, repair vs capital improvements documentation, disposition statement (sale), solicitor’s statement and land/building allocation.
  • Principal residence sale: sale contract, settlement statement, proof of previous cottage T2091 designation (2016) — the old T2091 or filed return copy.
  • Foreign dividend: foreign payor documentation showing gross dividend and withholding; bank statement showing net receipt; FX rate evidence.
  • Workpapers showing all manual calculations, FX rate chosen, assumptions.

9) Common mistakes new preparers make — and how to avoid them 🚫➡️✅

  • Using net foreign amounts only. Always enter gross foreign income and record foreign tax withheld separately for FTC.
  • Forgetting to allocate sale proceeds between land & building. This changes recapture and capital gain. Always find the allocation on closing docs.
  • Failing to account for prior PRE designations. If a property was claimed as a principal residence in prior years, you can’t re-use those years. Pull older T2091s.
  • Not reconciling UCC and prior CCA claims. Mistakes here lead to wrong recapture amounts. Reconcile year-by-year CCA history.
  • Skipping documentation of FX rate. Always record and store the exchange rate used and the source (Bank of Canada, actual received rate, or bank statement).

11) Handy quick reference cards (copy into your workpapers) 🗂️

Quick card — Foreign dividend

  • Enter gross foreign dividend → convert to CAD → enter foreign tax withheld → run T2209 for FTC.

Quick card — Rental sale with prior CCA

  • Step 1: Confirm UCC at time of sale. Step 2: Allocate proceeds to building & land. Step 3: Recapture = proceeds to class − UCC (if positive). Step 4: Compute capital gain on the land portion (50% taxable).

Quick card — PRE & previous designations

  • Pull old T2091s → count years already designated → apply PRE formula.

12) Final checklist before filing Gerard’s return ✅

  • All slips entered and matched to documents.
  • Foreign dividend gross & withholding entered; T2209 checked.
  • Rental disposition entered, CCA history reconciled, recapture confirmed.
  • Principal residence sale entered, T2091 designation done and years validated against the cottage designation.
  • Workpapers include FX rate, closing statements, proof of withholding, and prior T2091.
  • Diagnostics run in ProFile and errors resolved.
  • Client reviewed the return and signed required authorizations or e-file consent.

Final note — mindset for new preparers 🧠✨

Take it step-by-step. When cases combine pension income, foreign income and property disposals, document everything and do the math twice — once manually and once in ProFile — to catch software input errors. Keep excellent workpapers; CRA reviews often focus on property dispositions, foreign income, and CCA history.

Entering foreign dividends received from a UK company — the beginner’s ultimate knowledge base for tax preparers 🇬🇧💷➡️🇨🇦💵

A friendly, step-by-step guide for absolute beginners: what foreign dividends are, how to calculate the Canadian amounts, how Canada avoids double taxation (foreign tax credit vs deduction), and exactly how to enter the numbers in Intuit ProFile like a pro. Packed with checklists, clear worked numbers, ProFile field guidance, and quick-reference boxes you can copy into your workpapers. ✨

Why this matters (TL;DR)
Foreign dividends are not entered on Canadian dividend slips (T5/T3). They must be reported as foreign investment income at the gross amount (before foreign withholding), converted to CAD, and the foreign tax withheld is either claimed as a foreign tax credit (T2209) or, to the extent the credit is limited, the leftover tax can be deducted under the appropriate deduction line. Enter them correctly to avoid incorrect gross-ups, wrong dividend tax credits, and potential CRA adjustments.

🔎 Quick glossary (for total beginners)

  • Gross foreign dividend — the full amount declared by the foreign payer (before any local withholding).
  • Withholding tax — tax taken by the foreign country on the dividend before it reaches the investor.
  • Foreign tax credit (FTC) — a Canadian credit intended to avoid double taxation; calculated on T2209.
  • Exchange rate (FX) — the CAD conversion rate you use to translate foreign amounts into Canadian dollars; document the source (Bank of Canada daily/annual, or bank statement).

🧾 Worked example (use these exact steps with your client numbers)

Client received:

  • Gross dividend = £6,250
  • Withholding tax = £1,562.50 (25%)
  • Net received in bank = £4,687.50

Use the FX rate you choose and document it. Example uses the UK average FX 1.6076 CAD/GBP (we show the arithmetic step-by-step so you can reproduce it exactly).

Step-by-step arithmetic (digit-by-digit so you can double-check):

  1. Gross CAD = £6,250 × 1.6076
    • 6,250 × 1 = 6,250
    • 6,250 × 0.6076 = 3,797.50
    • Total = $10,047.50 CAD
  2. Withheld CAD = £1,562.50 × 1.6076
    • 1,562.50 × 1 = 1,562.50
    • 1,562.50 × 0.6076 = 949.375
    • Total = $2,511.88 CAD (rounded to cents)
  3. How it flows on the return (conceptually)
    • Report $10,047.50 as foreign investment income (not a T5).
    • Claim the $2,511.88 as foreign tax paid for the T2209 FTC calculation.
    • Suppose the software computes allowable FTC = $1,507.00; the remaining $1,004.88 (difference) can be claimed as a deduction (line 23100) to avoid double taxation. The net result: CRA sees the gross income taxed in Canada, but you get relief for much of the foreign tax through the credit and the rest via the deduction.

📌 Workpaper note: Always include (a) the foreign payor’s statement showing gross/net/withheld, (b) the bank deposit showing the net received, (c) the FX source and calculation, and (d) the T2209 worksheet printout.

How Canada treats foreign dividends (simple rules)

  • Do not put them on a Canadian dividend slip (T5/T3). They are NOT eligible for Canadian dividend gross-up or dividend tax credit.
  • Treat foreign dividends like other investment income (similar to interest) for reporting purposes.
  • Enter the gross foreign amount and the foreign tax withheld separately so the software can compute T2209.
  • The FTC cannot normally exceed the Canadian tax attributable to that foreign income — software limits it automatically; leftover foreign tax (if any) can be claimed as a deduction (line 23100 or equivalent), depending on the situation.

Intuit ProFile — exact field-by-field entry (for someone who’s never used tax software)

These steps assume a typical ProFile layout. Exact menu names may vary slightly by ProFile version — I show the practical path and exactly which values to enter.

  1. Open the client file → confirm taxpayer demographics and tax year.
  2. Go to Slips → Foreign employment, pension & investment income (slip 40 / foreign income worksheet)
    • Choose country: United Kingdom (UK)
    • Type: Dividend (foreign)
  3. Enter the foreign amounts (in foreign currency):
    • Gross foreign dividend: £6,250 (put in the gross currency box)
    • Foreign tax withheld: £1,562.50 (enter in the “foreign tax paid/withheld” box)
    • Date of receipt: enter the actual date (affects the FX rate if you use date-of-receipt rate).
  4. Enter exchange rate (ProFile will often ask):
    • FX rate used: type 1.6076 (or your chosen Bank of Canada rate). ProFile will convert the gross & withheld to CAD automatically and show the CAD equivalents (confirm the CAD amounts match your manual workpapers).
  5. Save the foreign income entry.
    • ProFile will carry the gross CAD amount to the T1 investment income area (not to the T5 dividend lines).
    • It will also populate the T2209 (Federal Foreign Tax Credit) fields with the CAD amount of foreign tax paid.
  6. Open the T2209 form inside ProFile and verify:
    • Foreign tax paid (CAD) = should show the converted $2,511.88 (or your calculated CAD).
    • FTC allowable — ProFile will calculate the federal limit. Confirm the computed amount and keep a copy of the T2209 for the workpaper folder.
  7. Check provincial tax credit — ProFile normally flows the provincial credit automatically; confirm the provincial line shows the matching converted foreign tax amount (subject to provincial limitations).
  8. If FTC < foreign tax paid:
    • ProFile often posts the excess to a deduction line (e.g., line 23100 — “Other deductions”) if applicable. Verify that the leftover $1,004.88 (in our example) is posted as a deduction. If not, manually enter it under the appropriate deduction field per the software prompts.
  9. Diagnostics & validation
    • Run ProFile validation/diagnostics. Look for warnings (e.g., “Check whether tax treaty applies”) and document whether the tax treaty affects withholding (note the treaty — UK/Canada — in notes).
    • Save and print the foreign income worksheet and the T2209 for your client file.

✅ ProFile tip: When the program gives a warning about tax treaties or section references, read it — in real cases treaty relief can change withholding rates or documentation requirements. Always keep the source documents attached to the client in ProFile (scanned dividend statement + bank deposit).

Boxes & notes (copy these into your workpapers) 🗂️

Note — FX selection
Choose one of: (a) Bank of Canada daily rate for the date of receipt, (b) bank’s actual conversion rate from the bank statement, or (c) an annual average if you consistently use that method for the year. Document which you used and why.

Caveat — tax treaty
Some treaties reduce withholding rates. If your client’s foreign country has a treaty with Canada (e.g., UK), the actual withholding may differ. Record any treaty-related relief and attach foreign payer communications.

Documentation checklist (must attach to client file)

  • Foreign payer statement showing gross dividend and withholding.
  • Bank deposit showing net received.
  • FX evidence (Bank of Canada printout or bank exchange statement).
  • T2209 worksheet printout and screenshots of ProFile entries.

Common beginner mistakes (avoid these!) 🚫

  • Entering net foreign amount instead of gross.
  • Putting foreign dividend amounts on a T5 (results in incorrect gross-up and dividend tax credit).
  • Forgetting to convert and document the foreign tax paid to CAD.
  • Not attaching original foreign documentation to the client file.

Quick QA checklist before you finish the file ✅

  • Did you enter gross foreign dividend in the foreign income worksheet?
  • Did you enter foreign tax withheld separately (foreign currency) and supply a date?
  • Did you enter/document the FX rate and confirm the CAD conversion matches your manual calculation?
  • Is T2209 populated and is the allowed FTC reasonable?
  • If there’s remaining foreign tax, is the excess shown as a deduction (line 23100) or otherwise accounted for?
  • Are all supporting documents attached to the ProFile client folder?

Reporting rental income & the disposition of a rental property — the complete beginner’s knowledge base for tax preparers 🏠📁💡

When a rental property is sold in Canada, two different tax events must be reported:

  1. Rental income and expenses up to the date of sale
  2. The sale of the rental property, including capital gain and possible CCA recapture

This guide explains both in a clear, beginner-friendly way, PLUS how to enter everything into Intuit ProFile.

🎯 Scenario Summary

A taxpayer sells their rental property after years of being a landlord. They previously claimed CCA (depreciation) because rental properties qualify for it. Over time the property increased in value — meaning:

• There is a capital gain on sale
• There is a recapture of CCA because the property rose in value instead of depreciating

This makes for a high-income year — common in real rental sale cases.

✅ Step 1: Report Rental Income (Form T776)

You must report rental activity only up to the sale closing date.

Key inputs in T776:

• Property address
• Start date and end date (end = sale date)
• Gross rental income collected before sale
• Eligible rental expenses before sale

Common deductible expenses:

• Mortgage interest
• Property taxes
• Insurance
• Utilities
• Repairs and maintenance
• Advertising
• Office & admin
• Legal fees related to tenant or rental issues (e.g., tenant damage, eviction letters)

🚫 Important: Legal fees connected to the sale closing are NOT deducted as rental expenses. They go into the property sale calculation instead.

⚠️ Special Tax Note

📌 Tenant-related legal fees are deductible
📌 Sale closing legal fees are NOT deductible — they increase the cost base of the property

🧾 Step 2: Calculate Capital Gain (Schedule 3)

Formula:

Sale price
minus Adjusted Cost Base (ACB)
minus selling expenses (legal fees, realtor fees, etc.)
= Capital Gain

Only 50% of the capital gain is taxable.

What affects ACB?

• Original purchase price
• Closing legal fees at purchase
• Capital improvements (not regular repairs)
• Land transfer tax
• Any sale-related legal fees & commissions deducted here, not on T776

🧨 Step 3: Calculate Recapture of CCA (Important!)

The taxpayer previously claimed depreciation (CCA).

If the property sells for more than the remaining UCC balance, the CRA “recaptures” the CCA claimed.

This recapture is fully taxable income — not a capital gain.

Example logic:

UCC (remaining cost after CCA claims) = $394,887
Property cost (ACB) = $472,980
Difference = $78,093 recapture

This amount goes to income on the return — reported on T776.

Reason: You told CRA the property was depreciating, but it actually appreciated.

🧠 Tax Learning Tip

CCA can save tax each year while renting.
But claiming CCA often increases tax when selling.

Only claim CCA if you’re sure you won’t sell soon — because recapture can hurt.

🧍 Final Tax Result Components

The tax return includes:

• Rental profit up to sale date
• Capital gain (50% taxable)
• Recapture of CCA (100% taxable income)

This can create a large taxable income in the year of sale.

💻 How to Enter in Intuit ProFile (Beginner Steps)

Step-by-step like you’ve never used software before:

  1. Open T776 form (Rental Income)
  2. Enter property address
  3. Enter rental start date and end date (sale date as end)
  4. Enter gross rent received
  5. Enter allowable expenses
  6. Do NOT enter sale legal fees here
  7. Scroll to line for “Recaptured CCA” — software will fill once CCA data entered

Now sale:

  1. Go to Schedule 3 (capital gains)
  2. Find “Real estate / depreciable property” section
  3. Enter:
    – Sale price
    – ACB
    – Selling expenses (legal fees, commissions)
  4. ProFile pulls these numbers into the recapture section
  5. Go to CCA worksheet (T776 CCA tab)
  6. Enter opening UCC balance for the year
  7. Enter sale proceeds in asset details
  8. Software automatically calculates recapture

Tip: In ProFile, blue fields are pulled from another worksheet. That means values link automatically.

⭐ Quick Recap for New Tax Preparers

Rental sale means:

• Rental income reported to sale date
• Deduct only rental-related expenses
• Sale legal fees go in capital gain calculation
• Capital gain = proceeds – ACB – selling costs
• CCA recapture = fully taxable
• Both amounts reported in return

📌 Key Takeaways

🚀 Rental sales create multiple tax layers
📈 Capital gains tax applies
♻️ CCA recapture adds taxable income
🛠️ ProFile automates math but YOU must enter correct figures

📝 Pro Tax Prep Tip

Always ask your client for:

• Purchase documents
• Sale closing statement
• Records of capital improvements
• CCA schedules from prior years

Without these, you cannot calculate capital gain or recapture properly.

🏡 Case Study: Reporting the Sale of a Principal Residence in Canada — Beginner’s Guide

Selling a principal residence in Canada can be simple for some, but things get more complex if other properties have previously claimed the Principal Residence Exemption (PRE). This guide explains everything a new tax preparer or individual needs to know about reporting a principal residence sale, calculating capital gains, and using Intuit ProFile step by step.

🎯 Scenario Overview

A taxpayer sold a city home in 2022 for just under $1,000,000. They purchased the property in 2014 for $599,800 and incurred additional legal fees and commissions when selling. Previously, the taxpayer had a cottage that claimed the PRE for the years 2014, 2015, and 2016.

Key Point: When other properties have already claimed the PRE, not all years of ownership of the new property are eligible for the exemption. Only the years not used by other properties can be claimed.

🧾 Step 1: Determine Years Eligible for Principal Residence Exemption

1️⃣ Calculate total years owned

  • Home owned since 2014 → 9 years

2️⃣ Subtract years previously claimed for other properties

  • 2014, 2015, 2016 were used for the cottage → 6 years remaining

3️⃣ Apply the “+1” rule in the PRE formula

  • Canada allows an extra year added to the exemption calculation
  • Eligible years for PRE = 6 + 1 = 7 years

💡 Note: Always check prior PRE claims (T2091) to avoid CRA audits. Misallocating years can lead to capital gains tax penalties.

⚖️ Step 2: Calculate Capital Gain

Formula:
Sale Price – Adjusted Cost Base (ACB) – Outlays/Expenses = Capital Gain

  • Sale Price = $989,000
  • ACB (Purchase Price + Acquisition Costs) = $599,800
  • Selling Costs (legal fees, commissions) included

Taxable portion:

  • Years not covered by PRE = 2 years (9 total – 7 eligible)
  • CRA calculates capital gain proportional to unshielded years

Example Result:

  • Net taxable capital gain = $81,005.59

🚨 Note: Even if most years are exempt, any leftover years must be reported and taxed.

📑 Step 3: Reporting in Intuit ProFile

Beginner-Friendly Steps:

  1. Open Schedule 3 → scroll to Principal Residence Section
  2. Enter:
    • Property address
    • Year acquired
    • Sale year
    • Sale proceeds
    • ACB
    • Selling costs (legal fees, commissions)
  3. For Designation Box, select:
    • “I designate this property as my principal residence for some but not all years owned”
  4. Enter number of eligible years (from Step 1 calculation)
  5. ProFile automatically calculates:
    • Portion of capital gain exempted
    • Portion taxable
  6. Double-check T2091 inputs if prior PRE claims exist

💻 Tip: Intuit ProFile links PRE calculations to T2091. Always keep prior PRE records handy for accuracy.

⚠️ Important Notes for New Tax Preparers

  • PRE protects taxpayers from paying tax on capital gains for most of their principal residence years.
  • If other properties have claimed the PRE, the formula reduces eligible years.
  • CRA requires disclosure of all sales, even if fully exempt. Non-disclosure can lead to penalties.
  • Always review T2091 from previous years to avoid double-counting exemptions.

🌟 Quick Takeaways

✅ Always calculate total ownership years
✅ Subtract years used for other properties
✅ Add 1 extra year for the PRE formula
✅ Enter exact eligible years in Intuit ProFile
✅ Only the non-exempt portion of the capital gain is taxable
✅ Keep prior T2091 forms and closing documents

📝 Pro Tax Prep Tip

Create a simple spreadsheet for every principal residence sale:

  • Column 1: Year owned
  • Column 2: Property claiming PRE
  • Column 3: Years available for current PRE

This helps prevent errors and makes Intuit ProFile entry straightforward.

This guide gives a complete beginner-friendly roadmap for reporting principal residence sales, calculating capital gains, and using ProFile like a pro, even if other properties have previously used the PRE.

💼 Case Study: Gerard Ratchford — Review of Senior Tax Return & What to Expect After Filing

Filing a senior’s tax return with foreign income, pensions, and property sales can be complex, but understanding the process is key for any tax preparer. This guide breaks down Gerard Ratchford’s tax scenario, explains what he can expect after filing, and shows step-by-step how to enter everything in Intuit ProFile, beginner-style.

🎯 Overview of Gerard’s Tax Situation

Gerard is a senior with multiple income sources and asset sales during the year:

  • Pensions: CPP, OAS, and other private pensions
  • Foreign Dividend Income: From a UK company, eligible for foreign tax credits
  • Property Sales: Two properties, including a rental property and a principal residence (some years exempt under the PRE formula)
  • Other Income Adjustments: Recapture of CCA on rental property and capital gains from unshielded years of the principal residence

Total income for the year: $255,000+, with complexities due to senior status and prior CCA claims.

📈 Key Tax Components

1. Pension Income & OAS Repayment

  • Seniors with high income may have to repay part of their Old Age Security (OAS)
  • Repayment is calculated at line 235 in the tax return
  • Example: Gerard owes $7,930 in OAS repayment due to income above the threshold
  • ProFile Tip:
    • Enter all pension slips (T4A, OAS)
    • ProFile will automatically calculate OAS clawback based on total income

2. Foreign Dividends & Credits

  • Dividends from UK sources go on line 121
  • Eligible foreign tax paid can be claimed as a foreign tax credit
  • Subsection 231 deductions may also apply for certain foreign investment income
  • ProFile Tip:
    • Enter foreign dividends under the T5 / Foreign Income section
    • Enter foreign taxes paid and deductions → software calculates foreign tax credit

3. Property Sales

  • Rental Property: Capital gain + recapture of CCA
  • Principal Residence: Capital gain on unshielded years
  • ProFile Tip:
    • Enter property sales under Schedule 3
    • Include adjusted cost base, selling expenses, and recaptured CCA
    • ProFile automatically calculates taxable portion and adds it to total income

💡 What Gerard Can Expect After Filing

1. Installment Notices from CRA

  • CRA may send notices assuming the high income continues
  • Example: Installments of ~$25,000 per quarter for next year
  • Solution: Estimate next year’s normal income (excluding property sales) and adjust payments accordingly

2. OAS Withholding

  • CRA may withhold OAS payments due to high income in the prior year
  • Gerard may see his OAS payments withheld entirely each month
  • Solution: File Form T1213 to request a reduction in withholding, showing projected income below the OAS clawback threshold

3. Potential CRA Review

  • CRA may review foreign dividend income, tax credits, or subsection 231 deductions
  • Always keep supporting documentation for foreign income, foreign taxes paid, and prior filings

💻 Step-by-Step in Intuit ProFile (Beginner Guide)

  1. Enter Personal Information
    • Gerard’s name, SIN, birth date, and marital status
  2. Enter Income Sources
    • T4 slips for pensions
    • T5 slips for domestic & foreign dividends
    • Schedule 3 entries for rental property and principal residence
  3. Enter Deductions & Credits
    • OAS repayment (line 235)
    • Foreign tax credits & subsection 231 deductions
    • Professional or investment-related deductions if applicable
  4. Schedule Installments & T1213 Form
    • If total tax owing is unusually high, calculate next year’s estimated income
    • File T1213 in ProFile → CRA will adjust withholding of OAS
  5. Review & Finalize
    • ProFile calculates total income, deductions, credits, and taxes owing
    • Confirm taxable capital gains, CCA recapture, and foreign tax credit calculations

💡 ProFile Tip: Blue fields are linked from other worksheets. Always double-check figures from prior years, property sales, and foreign income to ensure accuracy.

🌟 Key Takeaways for Tax Preparers

✅ Seniors with property sales may have unusually high income in a single year
✅ OAS repayment must be calculated if income exceeds threshold
✅ Foreign dividends require accurate foreign tax credit and deduction entries
✅ CRA may issue installment notices or withhold OAS payments — proactive planning is essential
✅ Keep all supporting documents for property sales, pensions, and foreign income
✅ ProFile automates calculations, but correct input is critical

This review of Gerard Ratchford’s tax return provides a complete knowledgebase for new tax preparers, illustrating senior tax nuances, foreign income, property sales, and how to manage CRA expectations, all while using Intuit ProFile efficiently.

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