Our homes are most often the largest asset that we will own in our lifetime.
Many of us are aware that when we sell our primary home, we generally do not have to pay any tax. This is referred to as the ‘principal residence exemption’, and it allows us to claim one property per year to be exempt from tax, so long as we are living in it on a regular basis. We share this exemption with our spouse and minor children, so it is available for one property per family unit.
The principle residence exemption is a tremendous tax savings when you consider the average price of a detached home in the Lower Mainland is now hovering around $1.7 million (Royal Lepage market report via CTV News). If you had owned that property for 10, 20 or 30 years you would have experienced significant growth in the value over that period of time and would pay zero-per-cent tax upon selling the home.
To ensure the zero-per-cent tax rate on the sale of your home, it must be reported on your tax return in the year of sale. The place to report the sale is form T2091, where you must indicate the sale price, the acquisition year, and the number of years you are claiming the principal residence exemption.
Failure to report on form T2091 will result in a $100/month late filing penalty up to a maximum penalty of $8,000.
When it comes to individuals who own multiple properties, such as cottages or rental properties, the tax savings opportunities are significant and quite often not known by many Canadians.
For example, if you own both a primary home and a cottage, the principal residence exemption is actually available to be used on either property, as long as you regularly inhabit the properties each year. Only one property per year is eligible for the principal residence exemption, and the optimal choice is the property that has the highest appreciation per year. Typically, this will be the primary home, as it tends to be larger and in a more urban area than the cottage. However, perhaps you have downsized or have a particularly valuable cottage. In these cases, you will want to analyze which property is the best choice to use the exemption on.
Rental property owners should be aware that if you begin living in your rental property, the property is deemed to have been sold by the CRA because you have changed its use. The result of this is that you would be paying tax on any capital gains that have accrued up to that date, without actually selling the property. There is an opportunity to defer the tax until the actual sale of the property by filing a 45(3) tax election with your tax return. Note that this tax election is not available if you have claimed capital cost allowance on the rental property, and the election must be filed with your tax return in the year of the change in use.
Another consideration for property owners is that the principal residence exemption rules have changed over the years. Prior to 1972 there was no capital gains tax, and from 1972 to 1981, there was one exemption per spouse, instead of the current rules of one exemption per family unit. If you have owned property for that length of time, it is worth consulting a professional to ensure you are paying the least amount of tax possible.
For more information on this, tune in to our Real Estate Tax Planning webinar on April 14 at 7 p.m. Register for free at at LT Wealth's website.
This column is courtesy of Patrick Caffrey, tax and estate specialist at LT Wealth Management Partners, an independent branch of Raymond James Ltd. You can contact Patrick directly at Patrick.Caffrey@raymondjames.ca.
Raymond James Ltd. is a Member of the Canadian Investor Protection Fund.