This post is about a short primer on capital gains taxation. I receive calls every month from agents about the tax consequences of their clients selling or gifting their properties. I advise them that I can only give them general advice but that their clients should consult a tax lawyer or accountant as everyone’s situation is different. The comments in this newsletter are not meant as tax advice but only to enlighten you as to the basics of capital gains taxation.
Anyone who sells, transfers or gifts real property is considered to have disposed of it at its fair market value. Certain situations also create a deemed disposition even if title hasn’t changed, e.g. death or the 21 year rule for trusts. The amount of capital gain incurred is the difference between the cost of the property and the proceeds of disposition. The capital gain is added to the person’s income and of course is taxable. If the transaction is a capital gain (principal residence, summer cottage, second home, rental home, etc.), only 50% of the gain is taxable.
However there are some exemptions from the capital gains tax. The primary one is the principal residence exemption if the property is the taxpayer’s principal residence. When a principal residence is sold, the gain is not taxable if it has been the person’s principal residence for the whole time it has been owned. If there has been a period where the property was rented out and it wasn’t the principal residence, or if it was partly a principal residence and partly a rental property, e.g. there was suite, there could be capital gains tax payable. Also a person or family unit can only have one principal residence in a year. You can’t claim your home as a principal residence while your spouse claims the vacation home as a principal residence.
However if the property has been purchased with the intent of reselling at a profit, or developed and sold as a business endeavor the entire gain is not a capital gain but is considered business income. There aren’t any set rules about how often a person can buy or build a house, move into and reside in it, then sell it, without the transactions being considered business transactions. Canada Revenue Agency (CRA) would look at the frequency and the intent (i.e., whether the houses were being purchased or built with the goal of reselling and making a profit, or because the person wanted a new house to live in or to rent out). They might even look at a single event of purchasing or building and reselling a house and decide that it was a business transaction, even if the house has been used as a principal residence.
As for property “flips” it is my opinion that someone who “flips” does not have a capital gain but that the “flip” is a business endeavour and the whole profit is taxable as business income.
I remind agents that I offer free telephone consultations for them. If you are not sure about something related to your offer or deal, do not hesitate to call or contact me. I am also available to give talks to your agencies or even at seminars you might hold for clients. My practice areas also include corporate commercial work, leases and wills, powers of attorney and estates.
Please feel free to call for a quote for your client’s transaction. I offer fixed all inclusive charges for transactions. Other lawyers or notaries might give a quote but when the client goes to sign, they find out there are extra charges that weren’t included in the quote. I will also visit the client in the evening or on weekends to sign documents.
David M. Simon
Barrister & Solicitor