Do you get capital gain exemption if you sell your old principal residence AFTER you moved into your new principal residence in Canada?
Do you get capital gain exemption if you sell your old principal residence AFTER you moved into your new principal residence in Canada?
It is a common practice that Chinese owners often buy a new home, move in then sell their existing home. Are they still eligible to get capital gain exemption?
1. The tax free portion of the capital gain from the sale of a principal residence is equal to:
Number of years (or part years) designated as principal residence plus 1 year divided by the number of years (or part years) owned
The “plus 1 year” serves to accommodate the situation where the taxpayer owns 2 homes in the same year – ie. where the taxpayer buys a new home before selling the old home.
2. Here's an example – the calculation of the tax free portion (if sold in 2011) is as follows:
Principal residence years (2002 to 2011) = 10 years
Ownership years (2002 to 2011) = 10 years
The tax free portion would be calculated as:
9 years (2002 to 2010) plus 1 divided by 10 years ownership = 10 years dividend by 10 years ownership = 100% tax free
Due to the “plus 1 year” part of the calculation – the taxpayer does not need to designate the old home as a principal residence for the 2011 year. Therefore, 2011 can be designated as principal residence for the new home to ensure that the tax free portion related to the future sale of the new home will be maximized.
3. If the old home is sold in 2012 – the tax free portion can still be 100%:
10 years (2002 to 2011) plus 1 divided by 11 years ownership (2002 to 2012) = 11 years divided by 11 years ownership = 100% tax free
However, the 2012 year can not be designated as principal residence for the new home. The loss of this 1 year may result in a portion of any future capital gain being taxable. However, the “plus 1 year” rule may avoid this problem when the new home is sold in the future.
4. If the old home is not sold until 2013 – then the capital gain will not be fully tax free.
5. The transfer of the old home to an adult child will be treated like an ordinary sale at the current fair market value. The vendor would calculate his/her principal residence exemption as discussed above. The adult child will be deemed to have purchased a house for the same fair market value. Whether this house can be a principal residence will depend on the adult child and will be subject to the same calculation rules:
the adult child must be a resident of Canada (for tax purposes) to have a principal residence;
he/she must actually live in the house as a principal residence.
6. The transfer of the old home to a step child will also be treated as an ordinary sale at fair market value – see above comments.
Tina Mak Personal Real Estate Corporation
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