Do I have to pay tax if I do improvements to my investment property?

If you are in the construction business (erecting buildings) or associated with someone in that business unexpected tax consequences may result from the sale of an investment property you own because of improvements that were made.

Legislation:

Under section CB 11 of the income tax act, a person in the business of erecting buildings who makes "improvements" to land and then sells that land within 10 years of completing the "improvements", is liable for income tax on the net sale proceeds. It is irrelevant whether the land was acquired for the purpose of the person's business of erecting buildings.

Section CB 11 also applies in the same way to a person who is not in the business of erecting buildings themselves but is associated with someone in the business of erecting buildings.

Example:

You are a self-employed builder. You have a personal trust that purchased a rental property eleven years ago. Your wife is the sole settlor and trustee of the trust. The beneficiaries are your two adult children. Two years ago, your wife organized for the rental property to be fully renovated, including the addition of a fourth bedroom.

Your wife has decided to take advantage of current property market conditions and sell the rental property.

Under the associated persons rules you are an associated person with the trust and with your wife. Therefore, any gain on the sale of the rental property will be taxable income to the trust as the property has been sold within 10 years of improvements being made to it and the owner is associated with a builder.

With the potential introduction of capital gain tax in coming years, these sorts of confusion will go away. Any gains made from the sale of investment property will be taxable.

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