Capital Gains - Real Estate | Income tax filing | Discussion forum

All the details are described in Chapter 6 (Principal Residence) of the T4037 Capital Gains 2020 Guide.

Did you actually have changes in use between personal-use and income-producing use?

That's not necessarily the same as changes in principal residence between different personal-use properties.

You bought your cottage in 1972 for personal use. You moved into the cottage in 1993 and the cottage became your principal residence. Cottage continued to be personal use. Cottage was still your principal residence and personal use when sold in 2020.

Looks like cottage was personal use 1972 to 2020. Cottage was principal residence 1993 to 2020.

Check out form T2091, it'll show you the calculation.

I believe nothing happens, assuming it was never a rental property, until you sell a property and then you can choose what years (during the time you owned it) you want to designate it as your principal residence. If you have 2 properties that you've used as residences, e.g. cottage and a city property, you can designate either one as your principal residence for any year for capital gain purposes, doesn't actually have to have been your principal residence for that year.

So when you sold your principal residence in 1992 you could decide how many of the years you lived in it you want to apply the principal residence exemption to the capital gain. Then same process for when the cottage was sold in 2020. Just can't use the same year for both properties.

In my case, I'll sell my cottage before my principal residence but I'll designate it as my principal residence for 100% of the years I owned it so I don't have to pay any capital gains tax on it. So if the taxable capital gain is $400K (say) I'll shelter 100% of it. When I die later and my house is sold they'll be unable to use the principal residence exemption for the years I already used it for the cottage, so if the gain is $800K and I lived in it for 50 years but used 40 years for the cottage exemption then my estate will only be able to shelter $800K X 10/50. Is the tentative plan, maybe someone can tell me if I'm making any mistakes here.

Depending on the circumstances, OP's cottage could be a principal residence also from 1972 to 1981!

According to Income Tax Act 45(1), there is only a deemed disposition for changes in use between

1. "for the purpose of gaining or producing income" and
2. "for some other purpose".

Changing one's principal residence designation from one personal-use property to another personal-use property, by itself, does not count for that. Both properties remain in the same "for some other purpose" use.

I don't see what the issue is. If I buy a stock at $100 and it dips to $50 before powering up to $200, then, when I sell at $200, I'm going to owe taxes on

$200 - $100 = $100 of gains.

There's no compensation for holding the stock as it dropped all the way down to $50 before it went to $200.

The articles presume that the owners were renting out their cottage before they turned the cottage into their full-time principal residence. That's not always the case. I don't think that was the case in your situation.

When articles don't agree with the Income Tax Act, guidance from CRA, or the tax forms, I go with the latter.

Sometimes articles are bad and are written by people who don't quite understand the details. One such article was recently discussed in Renting out basement apartment below fair market value.

That article erroneously said that one can make rental income tax free by just charging below market rent. Charge $1,600/month for the basement when everyone else is charging $1,800/month and the $1,600/month or $19,200/year is tax free. If only that were true!

There is no such intent in the legislation.

Income Tax Act 40(2)(b) prescribes that formula. B is actually one plus the number of years that the property was principal residence. Government did not intend to be exact:

40(2)(b) where the taxpayer is an individual, the taxpayer’s gain for a taxation year from the disposition of a property that was the taxpayer’s principal residence at any time after the date (in this section referred to as the “acquisition date”) that is the later of December 31, 1971 and the day on which the taxpayer last acquired or reacquired it, as the case may be, is the amount determined by the formula

A - (A × B/C) - D

where

A is the amount that would, if this Act were read without reference to this paragraph and subsections 110.6(19) and 110.6(21), be the taxpayer’s gain therefrom for the year,

B is

(i) if the taxpayer was resident in Canada during the year that includes the acquisition date, one plus the number of taxation years that end after the acquisition date for which the property is the taxpayer’s principal residence and during which the taxpayer was resident in Canada, or

(ii) if it is not the case that the taxpayer was resident in Canada during the year that includes the acquisition date, the number of taxation years that end after the acquisition date for which the property was the taxpayer’s principal residence and during which the taxpayer was resident in Canada,

C is the number of taxation years that end after the acquisition date during which the taxpayer owned the property whether jointly with another person or otherwise, and

D is …

It's not that unfair. If someone uses their cottage as their principal residence for 20 of the 30 years owned, then (20 + 1)/30 of the realized capital gains are tax free.

Someone else would be absolutely ecstatic if their price appreciation all occurred during the early years it wasn't their principal residence and the price was flat after it became their principal residence!