Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
THE FOLLOWING IS THE RESPONSE GIVEN TO A PUBLIC ENQUIRY REGARDING THE TAX IMPLICATIONS OF THE SALE OF A COTTAGE.
SUBJECT: SALE OF COTTAGE
I understand that your mother wishes to sell her cottage and that the sale may result in a gain.
In summary, the main option available for sheltering the gain on a sale of a property such as a cottage is the principal residence exemption. The $100,000 capital gains exemption, on the other hand, has been eliminated and is no longer relevant.
When the $100,000 capital gains exemption was eliminated in February of 1994, individuals where permitted to file an election claiming this exemption for property owned on February 22, 1994. The deadline for filing the election was April 30, 1995. However, a provision was also enacted to provide that such an election could have been late filed up to April 30, 1997, if the applicable penalty was submitted with the late filed election. As the deadline for late filing has passed, the capital gains exemption can no longer be claimed.
- The principal residence exemption essentially eliminates a taxpayer’s gain on the disposition of a property for each year the property is designated as the taxpayer’s principal residence. For your information, I have enclosed a copy of Interpretation Bulletin IT-120R4, Principal Residence, which explains the requirements and mechanics of the principal residence exemption. The following is a summary of the relevant considerations regarding this exemption: In order to qualify as the principal residence of a taxpayer for a taxation year, a housing unit, including a cottage, must have been “ordinarily inhabited” in the year by the taxpayer, the taxpayer’s spouse or former spouse, or the taxpayer’s child. A cottage is considered to be ordinarily inhabited by such a person, even though the person occupies the property for only a short period of time in the year (e.g., during vacation), provided that the principal reason for owning the property is not for the purpose of gaining or producing income. Incidental rental income will not prevent a cottage from qualifying as a principal residence.
- The land on which the housing unit is situated also qualifies as a principal residence, provided that the land does not exceed 1/2 hectare in size. Where the land exceeds 1/2 hectare, the excess will qualify for the principal residence exemption only where the taxpayer establishes that the excess was necessary for the use and enjoyment of the housing unit as a residence (this would be the case, for instance, where municipal laws, at the time of acquisition of the property, required a minimum residential lot size exceeding 1/2 hectare, and no portion of the minimum lot size is used for income-producing purposes).
- Where a taxpayer designates a property as his or her principal residence for a particular year that is subsequent to 1981, no other property may be designated as such for that particular year by the family unit (i.e., by the taxpayer, the taxpayer’s spouse or unmarried minor children). Therefore, if the principal residence exemption has already been claimed for another property by a member of the family unit, for a particular year subsequent to 1981, the principal residence exemption cannot be claimed in respect of the cottage for that year. Also, if more than one currently owned properties can qualify as a principal residence, such as a home and the cottage, consideration will also have to be given to the fact that if the principal residence exemption is claimed for the cottage, the exemption cannot be claimed on the subsequent disposition of the other property (including the deemed disposition at death) in respect of the years for which the cottage was claimed as a principal residence. Where there exists two properties which can qualify as a principal residence, and one of the qualifying properties is sold during a year, the issue of whether to claim the principal residence exemption on that property, for a particular year during which both properties qualified, will hinge on various factors such as the average annual gain on each property (i.e., the total gain on each property divided by the number of years held), the potential for future increases or decreases in value on the unsold property, and the anticipated holding period of the unsold property. With respect to the latter issue, personal factors may also come into consideration that would look beyond pure economics. For example, an individual may be concerned about immediate personal tax liabilities and less concerned about those taxes that will be payable after death by his or her estate.
- Special rules apply for property owned since prior to 1982, as for those years a taxpayer is allowed to designate a property as his or her principal residence even if another property has been designated as the principal residence of another member of the family unit for those years (i.e., each member of the family unit could designate a different qualifying property). These rules are explained in paragraph 17 of IT-120R4.
- Technically, the designation of a property as a principal residence must be done on Form T2091, and filed with the taxpayer’s income tax return for the year in which the property is disposed of. However, the Department’s administrative practice (as indicated in paragraph 13 of IT-120R4) is that Form T2091 need not be completed and filed unless a taxable capital gain on the disposition of the property remains after using the principal residence exemption.
In the event that it is decided not to claim the principal residence exemption in respect of the sale of the cottage, another consideration is whether a capital gains reserve can be claimed. Such a reserve can only be claimed if the proceeds of disposition are not all payable to the seller in the year of sale. This reserve essentially defers the taxation of a portion of the capital gain to subsequent years (over a maximum period of 5 years) as the proceeds become payable, subject to specific limits. If this situation is anticipated, I would be pleased to provide you with additional information on this reserve.
M. Azzi
April 2, 1998
0-980772
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© Her Majesty the Queen in Right of Canada, 1997
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© Sa Majesté la Reine du Chef du Canada, 1997
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