It is dangerous to assume that a gain realized when you sell your house is automatically tax free
Maroney on Money for June 15, 1997
If you sell your house for more than you paid for it do you have to pay income tax on the capital gain? The answer, as with most income tax problems, depends on the facts in each particular situation.
One of the tenets of Canadian income tax is that, in general, a taxpayer does not have to pay income tax on any gain realized on the sale of his or her home. Although this is most often true, it is dangerous to assume that a gain realized on the resale of your home is automatically tax free.
In order to avoid income tax on a gain on the sale of your residence, your property must meet the definition of a principal residence in each year in which you owned it. Fortunately, the definition is found in a single sentence in the Income Tax Act. The only problem is that the sentence is over 900 words long and contains over 50 commas.
A detailed review of the principal residence exemption is a certain cure for insomnia. Rather than slogging on through the definition I'll focus, instead, on one key area in which taxpayers often run afoul of the principal residence rules.
The most frequent difficulty arises where the principal residence is located on land in excess of 1/2 hectare. For the metrically challenged among us this represents approximately 1.24 acres which is almost a quarter acre larger than the amount which was allowed in the pre-metric era. Where the property on which your house sits exceeds 1/2 hectare, the excess land cannot be sheltered from tax by the principal residence exemption unless it is necessary for your "use and enjoyment".
Of course all taxpayers will want to argue that they require their 100 acre spread for their "use and enjoyment" and, therefore, the entire gain should be tax free. Unfortunately, Revenue Canada interprets this term somewhat differently than its literal meaning.
From Revenue Canada's perspective, the land in excess of 1/2 hectare must clearly be necessary for the housing unit to fulfil its function as a principal residence and not simply be desirable (for example, for privacy reasons).
Situations in which Revenue Canada might consider the land in excess of 1/2 hectare to be treated as part of your principal residence include the following:
(a) where government laws impose a minimum residential lot size restriction in excess of 1/2 hectare. This would be the case where your home is located in an area of two acre zoning for example. Revenue Canada considers zoning in effect on the date of acquisition to be the key factor here, however, consideration must also be given to severability at the time of sale;
(b) where the size or character of the house including its location on the property makes the excess land essential to its use and enjoyment as a principal residence. Few people own homes which cover 1/2 hectare (although Bill Gates would fall into this category if he lived in Canada), however, the need for a large septic field or well might be a factor to consider here, and
(c) where the home is located on the property in such a way that the excess land is necessary to provide access to and from a public roadway.
Many taxpayers may unknowingly find themselves sitting on rather large tax bills much to their surprise. Make sure you understand the rules before you decide to cash in.
Jim Maroney is a chartered accountant with Andrews, Brown, Maroney in Maple Ridge.
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