FP Solutions: Will I pay taxes if I rebuild my residence and promote it?

Article content material

Q. If I tear down after which rebuild my principal residence of 32 years and promote it with out shifting in, will I’ve to pay any capital features tax or Harmonized Gross sales Tax (HST)? Is there the rest I ought to pay attention to so I don’t get within the crosshairs of the Canada Income Company (CRA)? — Vera

Article content material

Article content material

FP Solutions: To greatest perceive how this transaction could also be taxed, we have to overview a number of concerns surrounding your proposal, Vera. The principal residence exemption (PRE) and its nuances are the primary place to start out.

Article content material

• In Canada, to qualify for the principal residence exemption, a property wants to satisfy 4 assessments:
• It must be a housing unit, leasehold curiosity in a housing unit, or capital inventory of a co-operative company that means that you can inhabit the unit;
• You need to personal the property outright or collectively;
• You, your present or former partner, or youngsters lived within the property;
• You will have designed the property as your principal residence.

Additionally, the dimensions of the property should sometimes be on land that’s not more than a half hectare in dimension, or among the sale proceeds could also be taxable.

In case you reside in and promote the property in the present day, as is, you could possibly stroll away with out having to pay any tax, assuming you haven’t owned one other property the place you claimed the PRE through the time you have got owned your house, Vera. The difficulty for the PRE, because it pertains to your proposal, is that your renovation could or could not let you qualify absolutely for the PRE. There are additionally potential gross sales tax implications.

When finishing a substantial renovation, a property could qualify as a newly constructed property if the inside of the house has been gutted and meets the 90 per cent check, that means that no less than 90 per cent of the inside has been eliminated as a part of the method. You don’t essentially must take away elements of the construction, resembling the inspiration, exterior partitions and flooring, to qualify for this check.

Article content material

Article content material

The secret’s to give attention to the livable areas of the house and whether or not these elements add as much as 90 per cent. So, as an illustration, crawl areas aren’t livable and could also be excluded from the calculation.

In case your “tear down” does surpass the 90 per cent check, then it’s possible you’ll be thought of a “builder” for CRA functions and you might have to remit HST or items and companies tax (GST) on the honest market worth or sale worth of the house. Gross sales tax could apply whether or not you progress in and maintain the property otherwise you promote the property.

Because you lived within the property for 32 years, you wouldn’t be answerable for capital features tax for these years when the house was thought of your principal residence. However you might have some tax to pay if you find yourself renovating the house after which promoting it for a revenue. You’ll be thought of to “dispose” of the house at its honest market worth once you start the renovation and instantly reacquire it. Renovation prices would enhance your price base accordingly.

In case you then promote the property with out shifting in, Vera, the tax remedy could also be thought of that of a list sale. On this case, although it’s possible you’ll want the revenue to be tax-free utilizing the principal residence exemption, or taxable as a capital acquire at a lowered tax charge, it’s going to most likely be thought of as absolutely taxable enterprise revenue.

Article content material

In case you transfer into the house and subsequently promote it, you should still want to incorporate the proceeds of the sale as enterprise revenue if it may be established that you simply constructed the property as a way to earn revenue. CRA could overview the intent behind your renovation and subsequent sale.

Vera, as with all complicated tax conditions, we suggest that you simply seek the advice of with a certified tax skilled to overview your concerns to have full readability in your tax publicity.

Andrew Dobson is a fee-only, advice-only licensed monetary planner (CFP) and chartered funding supervisor (CIM) at Goal Monetary Companions Inc. in London, Ont. He doesn’t promote any monetary merchandise in any respect. He may be reached at adobson@objectivecfp.com.

Bookmark our web site and help our journalism: Don’t miss the enterprise information you’ll want to know — add financialpost.com to your bookmarks and join our newsletters right here.

Article content material