Spring is a popular time for buying and selling houses, cottages and condos. Good planning around these transactions could help you to make significant income tax savings.
The sale of a residence
Capital gain on the sale of any residence is taxable. However, as a rule, the principal residence exemption means that you pay no income tax on the sale of your house if it was your sole residence during all the years you owned it. To benefit from this exemption, you must submit a specific form along with your annual income tax return.
The definition of principal residence is not limited to your house.
If you own a cottage or any other secondary residence where you or your family usually live, this may also qualify as a principal residence, even if you only spend a few weeks a year there. A residence outside Canada, such as a condo in Florida, may also be designated as a principal residence.
Accordingly, you may have more than one principal residence that qualifies for the exemption. However, only one tax-exempt principal residence may be designated for each family unit (spouse and dependent children) in the same year.
Proper planning of these transactions can significantly reduce the amount of taxes owing when the property is sold.
For instance, in the event that the value of your secondary residence appreciates more than your home, it may be advisable to designate it as your principal residence, in order to exempt the added value from income tax.
Buying a residence
To calculate the capital gain from the sale of a residence, you must subtract from the selling price the home’s original purchase price (including notary fees, property transfer fees, etc.), but also the cost of certain other investments.
For instance, if you have done major renovations or landscaping, the cost of this work may be included in your calculation. Essentially, the greater your costs, the lower your capital gain.
So, if you own more than one home, it is important to keep all related invoices for all your properties, since you never know which one it is going to be more advantageous to designate as your principal residence.
Renting out your residence
Before you consider renting out any of your residences, it is important to look into the potential tax implications.
In fact, in addition to being taxed on the rental income, should you rent out your residence other than in an incidental manner, you are considered to have changed the use of the property for income tax purposes. This change could involve a deemed disposition.
Please contact your FBL specialist. for any further information in this regard.