A place for readers | Capital gains: your questions answered


Our little explanatory file on the new capital gains tax rules, published last Sunday, generated interest, meaning questions and comments.




Read “Capital Gains Tax for Dummies”

Financial planner and tax specialist Josée Jeffrey of pensions and tax company Focus explained the basics in a fictitious exchange evoking the sale of a cottage worth $450,000 in 2024 and paid for for $100,000 12 years earlier.

He continues the dialogue, this time with our readers.

In your example, we can add $31,310 to the $100,000 purchase price to account for inflation between 2012 and 2024, or 31.31%.

B. Laporte

Jose Jeffrey: No, you cannot discount your expenses or purchase costs, i.e. index them to inflation. Real numbers need to be considered. I add an important detail: we must not confuse the market value and the municipal value of the property. You will use the services of a certified appraiser or real estate appraiser to determine the fair market value.

It seems to me that before putting the second home up for sale, it can be designated as a primary residence to avoid declaring a capital gain. Could you provide an explanation?

L. Côté

Jose Jeffrey: Yes, you are absolutely right.

Remember that the concept of principal residence applies to multiple properties owned by a taxpayer. A property can be designated as a personal residence for a given year provided that its use is personal and that it has been “normally occupied” for even one day during a certain period of the year. It is therefore possible that your cottage or second home may be designated as your main residence. However, you can only designate one principal residence per year. When liquidating one or the other of your headquarters, you will have to choose a designation year for each one according to the realized added value. The marking is done year by year.

A residence usually occupied by a minor or adult child, spouse or ex-spouse qualifies as a principal residence, even if you received rental income from these individuals.

In addition, in tax terms, there is a very important rule that allows one year to be added to the years marked as the main residence on each property, the so-called “+1 rule”. But let’s not go into too much detail…

Advice for owners. NOO 1: keep your improvement invoices and don’t pay under the table. NOO 2: look at the evolution of the market value of your cottage over the last 12 years before considering selling by 25 June. It can be your best investment for the future.

G. De Bellefeuille

Jose Jeffrey: I agree with that. A hasty sale could result in the loss of several thousand dollars in potential capital gains on the cottage.

Your advice is correct. To minimize the capital gain on the sale, it is essential to correctly determine the adjusted cost basis of the cottage and principal residence where you regularly reside. To determine which of the two will take advantage of the principal residence exemption, you will need to factor in the expenses of all your personal property.

For each, include the initial purchase price as well as expenses for major renovations, such as adding a garage or shed, installing a pool or bathroom. Remember to factor in acquisition costs such as transfer taxes, legal and inspection fees, keeping all supporting invoices.

I currently have an apartment that serves as my cottage. If I sell it, can I include flat fees, council and school taxes to increase my purchase price?

N. Mongeau

Jose Jeffrey: Oh no! Only transfer taxes paid at the time of your acquisition will be added to your purchase price. Apartment fees, also called common fees, are usually maintenance and management costs. Property taxes also represent user costs. However, if you have paid significant amounts as a special allowance, these may be added to your base price depending on the nature of the expenses.

Are appraisal costs added to the purchase price when selling a rental property? I’m wondering what the difference is between the effective tax rate and the marginal rate and when one or the other is used.

Reader

Jose Jeffrey: Yes, the cost of major improvements is added to the purchase price.

In short, the effective tax rate is calculated by dividing taxes paid by total income. It gives you a quick look at the percentage of your tax liability over the course of the year. The marginal tax rate is the percentage of tax paid on the last dollar earned in a given year. It will be helpful for you to know the tax impact of certain strategies, such as contributing to your RRSP.

I believe it is possible to defer capital gains taxation by not paying the amount immediately. It’s a reserve. Assume the triplex sold for $1,000,000 with a capital gain of $600,000. We take out a second mortgage (balance from sale) of $500,000, or 50% down. The capital gain in the year of sale is $300,000 and when the sale balance is collected, $300,000.

A. Renaud

Jose Jeffrey: In fact, it is possible to divide the balance of the sale price to be received over four years after the sale of the property, in this case your triplex. You will then claim a reserve to defer your capital gain. You must be a resident of Canada as of December 31 of the applicable tax year. But there really has to be a balance to be paid in order to benefit from this reprieve.

You can designate a secondary residence abroad as your principal residence for Canadian tax purposes.

C. Stubborn

Jose Jeffrey: I confirm that the principal residence exemption applies to personal use property held abroad. Tax may be payable in this country.

What happens to the capital gain if I inherit the cottage my father built in 1976? The cottage is now worth around 1.5 million.

Reader

Jose Jeffrey: You are deemed to have acquired this cottage for its fair market value on the date of your father’s death. For example, if his cottage was worth $800,000 when he died and you now sell it for $1.5 million, you will have a capital gain of $700,000. The calculation of taxable capital gain will depend on all the elements mentioned above. Remember, with the new tax rules coming into effect on June 25, the personal capital gains inclusion rate will increase from 50% to 66.67%, but only on the portion above $250,000. The inclusion rate remains at 50% on the first $250,000, meaning that 50% of that gain is added to taxable income for the year.

Attention! There are three key dates to consider when calculating the capital gain for your father’s cottage. Before 1972, the concept of capital gains did not exist. If your father owned the cottage on that date, it is necessary to determine its value on December 31, 1971, so that it is excluded from the calculation. In addition, prior to 1982, each spouse could have their own principal residence, so each could benefit from the capital gains exemption.

On February 22, 1994, taxpayers could use their old lifetime exemption of $100,000 on their capital property. It is possible that your father took advantage of this exemption by designating his cottage, which would increase its current cost.

I can’t get a clear idea about the new capital gains standards. In 2006, my partner and I bought an old cottage on the water’s edge for $130,000. In 2014, we completely demolished the cottage to build the house that has since become our main residence. The award rose to $350,000 at the time. In 2024 our property is now worth $600,000 according to the new assessment list. We have no other property.

S. D’Amours

Jose Jeffrey: We will assume that you occupied another main residence prior to the construction of the new country residence in 2014.

The base price of your property will include your acquisition cost of $130,000 in 2006 plus all of your additional construction costs, including demolition costs.

As a reminder, when calculating the capital gain of a residence, you must consider the market value and not the appraisal of the property.

Here’s a quick calculation assuming a market value of $650,000 on one side and a rebuild cost of $320,000 (including demolition costs) plus your 2006 cost of $130,000 on the other.

If you sell it in 2024:

  • Capital gain before principal residence exemption ($650,000 – $130,000 – $320,000): $200,000
  • Years of ownership: 19 (2006 to 2024)
  • Years designated as principal residence: 11 + 1 (years 2014 to 2024 plus one year under the “+1 rule”)
  • Capital gains exemption (12 years out of 19, or 63.2%): $126,316 ($200,000 * 12 / 19)
  • Capital gain to be declared: $73,684 (with 50% inclusion rate) = $36,842 split between two co-owners ($18,421 each)

The longer you keep your residence, the more the exemption percentage will increase. Of course, the market value will also increase! But you won’t complain…





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