The Planning and Tax Implications from Owning 2 or More Residences.
Owning multiple residences in Canada can be an ordeal when it comes to taxes.
Normally on the sale of a principal residence, the capital gains made are tax exempt, however this can become a more complicated matter if gains arise from the sale of more than one residence. However, there are solutions to help manage the tax burden with appropriate tax planning.
The definition of a “Principal Residence ” is essentially regarded as a single housing unit that is situated on a surrounding property to a maximum size of no larger than an acre (one half a hectare). However, any property that exceeds this size can still be considered part of the principal residence if the land is solely used for domestic purposes.
A property must be inhabited in the period of a year by the owner in order for it to qualify as a principal residence. However, this is not to be confused with the necessity to inhabit the residence « through the year ». To discern the difference, a tax payer may sell one house and purchase another in the same year, therefore it could be considered that they could have inhabited both properties in that given year.
Therefore, the inhabitation of a property that is only periodic such as being inhabited for only a few months per example, may still qualify as a principal residence.
When it comes to managing the principal residence exemption, there are two important things to consider.
1 Determining whether using the exemption is the best course of action in the event of a property sell; and:
2. Consider transferring the property to other family members to shift future growth.
If the property is expected to increase in value over time, it may be advantageous to consider transferring the property to the next generation now, in order to limit your tax liability in the future.
However, this course of action may result in the requirement to pay capital gains tax now and there is also the consideration of land transfer tax (“welcome tax”) that will also be applied to the transaction that may require an additional cash outflow.
A property owner will also need to consider family law related issues and creditor protection. Therefore, you might want to decide to shelter your tax liability now by applying the principal residence exemption and defer your tax payment in the future on the sale of the property.
It is also possible to hold the property in a family trust in order to keep legal control if transferring the property to a family member is not deemed a preferable option.
Even though the transfers of the property to a trust would still have a taxable requirement, it would at least ensure the owner their right to exercise legal control over the property in question.
There is evidently a larger tax burden as a consequence of owning multiple properties. One example, of a possible scenario could involve the need to sell one of the properties in order to cover the tax bill of another.
However, there are ways to circumvent the possibility of having to sell a property such as the family cottage, due to the tax liabilities that arise in the event of a death.
A good strategy would be to purchase life insurance. This would be a safe measure to ensure that there would be sufficient funds for covering all tax obligations, thus allowing the property to remain with the family.
If you are considering purchasing a second or multiple residences, it is always advisable to contact your local CPA Office as there are numerous tax issues involved with the ownership of more than one property.
Consulting a tax professional can help to ensure that the purchase of a property is structured in a most effective manner to make the transaction as less taxing as possible
This article only provides information in a general nature and is only as current as the date in which it is posted. It is not updated and therefore may no longer be current. This document should not be relied upon as it does not claim to, nor provide advice on legal or tax matters.
All tax situations are specific in nature and will likely differ from the situations that are presented in the article. It is advisable that you seek and consult a tax professional if you have any specific legal or tax questions.
This document is intended to provide general information on a particular subject or subjects(s) and this article is not an exhaustive treatment of such subject(s). In accordance, the information in this document is not intended to constitute or replace accounting, tax, legal, investment, consulting, or other professional advice or services.
Before any decision is made, or any action taken which might affect your personal finances or business, you should consult a qualified, professional adviser.