Selling your chalet without paying tax, really? Yes it’s possible. See how.
Pierre Hénault and Lucille Vandal, two subscribers to the Courrier de l’ économique du Duty, are wondering how to sell a cottage without the capital gain being taxed. Yes, it is possible to benefit from the exemption, even if you also own a house. The principal residence exemption remains the avenue to take. And this exemption can apply to a wide range of properties, including chalets. So, to respond to Charlotte Therrien, another subscriber to the newsletter, this applies even if the chalet is habitable six months a year, therefore not equipped for winter, we must understand. Even for the condo in Florida, if the owner is a Canadian resident.
Let’s look at what Chartered Professional Accountants (CPAs) are saying:
You must be the owner of the residence (alone or with another person);
Only one property per year per family can be designated as a primary residence. The Canada Revenue Agency does not specify the exact length of time during which the taxpayer or members of his or her family (spouse or common-law partner and children under 18 years of age) must live in the dwelling in order to designate it as such. We are talking about a residence normally inhabited during the year. So a few days or weeks may be enough;
The property must be designated as the principal residence in the income tax return for the year of disposition of the property.
And the rental?
It can get complicated in a rental situation, explains Olivier Levesque, tax director at Raymond Chabot Grant Thornton (RCGT). If the chalet is rented for a small portion of the time, if the rental is incidental or occasional, it should normally retain its so-called personal nature. But if it is rented over a long period in order to earn income, it no longer has the same purpose. And a change of purpose triggers a presumptive disposition at fair market value. So here we get into the nuances.
The CPAs add that property mainly used to earn income, or appearing in an inventory, cannot benefit from the exemption. This category includes, in particular, homes for exclusively rental use, long or short term. It could also include buildings with several dwellings, only one of which constitutes the home of the owner, who rents the others and earns income from them.
Even if the interpretation could, here, include gray areas, particularly for the portion inhabited by the owner or members of the family, the RCGT tax specialist once again wishes to qualify. “The exception is, however, property normally inhabited by the owner, but rented occasionally and on a short-term basis: for a few weeks in summer if it is a chalet, for example, or if the owner registers his house on Airbnb while on vacation. An exception is also property rented by the owner to a member of his family,” add the CPAs.
Which one to designate?
If you own both a house and a chalet, which residence should be given primary status? The question is all the more relevant as we have witnessed a surge in real estate prices, perhaps stronger for chalets, and in a shorter period of time. In short, it’s a question of mathematics, of latent gain divided by the number of years of ownership.
Olivier Levesque gives the example of a house purchased in 2000 and a chalet acquired in 2010, both sold in 2020, each with the same latent capital gain of $100,000. We are talking about a holding period of 21 years for the house, 11 years for the chalet, which brings us to a latent gain of $4,762 per year in the first case, $9,091 in the second. As the chalet displays a higher latent gain per year, we will want it to be entirely exempt.
Note that the law grants one year as a bonus, to take into account a transactional period between the purchase and the sale. The formula: 1 + number of designated years, divided by the total number of years of ownership. Thus, taking into account the free year, we will designate the chalet as our main residence for ten years. The free year, plus 10 years of designation, divided by 11 years of ownership, results in the capital gain on the sale of the cottage being completely exempt.
For the house, the period of designation as principal residence would be 2000-2010, to which is added the free year. So, 1 + 11 years of designation divided by 21 years of ownership equals 57.14%. This percentage applied to the unrealized gain of $100,000 means that the taxable capital gain on the sale of the house is $42,857.
And we know that only half of the capital gain is taxable.
Clarification: The classic answer would invite you to consult a financial planner or a tax specialist. A situation may be unique, even complex, and contain particular nuances which would justify the payment of fees in order to minimize the tax impact or avoid unpleasant surprises. Or even if only to properly complete your declaration. This answer remains valid and relevant.