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Principal Residence and Capital Gain

Canada Revenue Agency has issued new guidelines affecting capital gains.

  1. What qualifies as a principal residence?

    According to the Canada Revenue Agency any residential property owned and occupied by you or family at any time in a given year could be designated as a principal residence.  So, if you own and live in a detached or townhouse, a condominium, a cottage, a mobile home, a trailer or even a live-aboard boat, you can designate the property as your principal residence.

    The designation of a property as a principal residence is a significant and important financial planning tool because the CRA allows you to shelter the profits earned on the sale of a principal residence from taxes owed.
  2. How do capital gains and the principal residence exemption work?

    This exemption is key as all property – including your home, cottage, real estate rentals, even stock portfolios – are subject to capital gains tax when they increase in value.  Known as a capital gain, this appreciation in the value of an asset is subject to tax which is known, simply, capital gains tax.

    From an investor’s perspective the capital gains tax is quite advantageous because it only requires that you pay tax on half the profit earned and only at our marginal tax rate.  So, if you end up selling a rental property in Kingston, Ont. you’d have to pay capital gains tax on the $60,000 profit you made from that sale.  Under tax rules, you’d only owe tax on $30,000, based on your marginal tax rate.  (This simple illustration omits other factors, such as capital cost allowance and expenses paid.)  If you earned $60,000 per year, the tax you owed on the sale of the property would be just under $9,575.  Earn the same in interest and you’d end up paying the taxman more than $22,565 (just on the investment earnings).

    Even better, if the accommodation you’re selling isn’t an investment but your principal residence, the CRA provides a full exemption from all capital gains tax you would’ve incurred.
  3. Where can I get more information?

    Finally, if you want more information on how these recent changes will be applied, the CRA will be providing more detailed instructions in the T4037 Guide:  Capital Gains 2016.
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