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Real Estate Sales - Are They Taxable? What About My Principal Residence?
The gain on the sale of real estate is a capital gain unless the property has been purchased with the intent of reselling at a profit, or developed and sold as a business endeavour. If it is considered a business transaction, the entire profit or loss on the sale is taxable or deductible. If the transaction is a capital gain (principal residence, summer cottage, second home, rental home, etc.), only 50% of the gain is taxable.
If the property is the taxpayer's principal residence, the principal residence exemption may eliminate all or part of the capital gain. The Canada Revenue Agency (CRA) policy used to be that the form need not be filed unless there is a taxable gain after deducting the principal residence exemption, or a capital gains election was filed in respect of the property in the taxpayer's income tax return for 1994. However, beginning with the 2016 taxation year, all principal residence sales must be reported on the income tax return.
Date of Ownership for Tax Purposes
The sale of real estate will be reported on your tax return for the calendar year in which the legal title to the property is transferred to the buyer - this is the completion date. The possession date is the date on which the buyer is given the keys and can move in, which is often 1 or 2 days after completion date, but could be on the same date.
Prior to 2022 legislation, there weren'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. 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. Check out the current version of Interpretation Bulletin, IT-218R (Archived), re profits on the sale of real estate, especially the first few paragraphs. See also the case of Hansen v. The Queen, with 5 houses bought and sold over 6 years - link at bottom.
This does NOT mean that selling a residential property that has been held at least 12 months will automatically not be viewed as a case of property flipping. The Income Tax Act, which already make property flipping taxable as business income, will still apply to those sales.
See also the Video Tax News May 2022 Life in the Tax Lane re the federal 2022 budget and property flipping.
Land Without a Housing Unit
If land is purchased without a housing unit on it, that property cannot be considered the principal residence until the year that a house is built and you move into it.
How Much Land for the Principal Residence Exemption
CRA usually considers that if there is more than 1/2 hectare (1.25 acres) of property, only 1/2 hectare of the land can be considered part of the principal residence, and there would be a capital gain on the excess when the property is sold, even if the rest is the principal residence. However, they also consider whether the property is subdividable. Thus, if the property is 2 hectares, and is not subdividable, they may consider the whole amount of the land to be part of the principal residence.
There was a lot of information on this topic in CRA's Interpretation Bulletin IT120, Principal Residence, including the part about building on vacant land, the 1/2 hectare rule, etc. This bulletin is no longer available - it was replaced by Income Tax Folio S1-F3-C2: Principal Residence, which contains a link to form T2091(IND) for the principal residence exemption.
Real Estate (Capital Property) Gifted or Sold Non-Arm's Length
If you plan to gift real estate or other capital property to a non-arms-length person, or sell it to them at less than fair market value (FMV), there may be tax implications. See Are Gifts or Inheritances Taxable?
Tax Court Cases
Salama c. Quebec Revenue Agency, 2022 QCCQ 718 (CanLII) - re multigenerational home
Tax Tip: Before making any real estate investments, make sure you know the tax consequences.
Revised: September 24, 2023
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