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Be Smart About Using Your Principal Residence Exemption – Carman Valley Leader

September 18, 2015

The following article was published in the Business Directory on September 25th in the Carman Valley Leader.

In our last article on June 12, 2014, we had Jim and Betty owning:

  • a house in Manitoba for 24 years and worth $300,000 with a cost base of $200,000,
  • a condo in Arizona owned for 4 years and worth $450,000 with a cost base of $150,000,
  • a cottage for 24 years and worth $500,000 with a cost base of $300,000.

Between the house and cottage owned for exactly the same time (1990-2014), they should use their exemption on the cottage as it has greater gain. But the condo in Arizona has even greater gain! Assume they want to sell the Arizona condo this year they should elect the Principal Residence Exemption for 2010-2014 on their Arizona condo which will save all the Canadian tax on the condo. They also sell their house in 2014; they should pay capital gains tax on that property as it has the least gain. Tax would be split between their 2 returns, $25,000 each x their tax rate (maximum $11,650). This would leave 24 years plus one extra year (which Canada Revenue Agency generously gives us) and any years after 2014 for them to claim the cottage as their principal residence.

The formula being:

# of years you elect to use as your P.R. +1                 = Amount of gain exemption
# of years you own the dwelling place                                        from tax

Assume they sell the condo and house in 2014 and their cottage in 2016. They would pay no Canadian capital gains tax on the condo saving tax on $150,000.

On the cottage they can claim the principle residence exemption on the years before and after the condo:

(1990-2010) + (2015-2016) +1                    = 23    is the capital gain exempt on their cottage
1990-2016                                                      26

So they only pay tax of $11,538.47 on the cottage sale [$100,000 – (23/26 x $100,000)].

It clearly pays to discuss with a professional when you sell your first dwelling place if you own more than one!