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 transferring in, will I’ve to pay any capital positive factors tax or Harmonized Gross sales Tax (HST)? Is there anything I ought to concentrate on 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 evaluate 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 permits you to inhabit the unit;
• You have to personal the property outright or collectively;
• You, your present or former partner, or kids lived within the property;
• You’ve 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 measurement, or a few of the sale proceeds could also be taxable.

In case you stay in and promote the property at this time, 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 in the course of the time you could have owned your own home, Vera. The problem for the PRE, because it pertains to your proposal, is that your renovation could or could not help 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 take a look at, 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 components of the construction, resembling the muse, exterior partitions and flooring, to qualify for this take a look at.

Article content material

Article content material

The hot button is to deal with the livable areas of the house and whether or not these components add as much as 90 per cent. So, for example, crawl areas will not be livable and could also be excluded from the calculation.

In case your “tear down” does surpass the 90 per cent take a look at, then chances are you’ll be thought-about a “builder” for CRA functions and you could have to remit HST or items and providers tax (GST) on the truthful market worth or sale value 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 responsible for capital positive factors tax for these years when the house was thought-about your principal residence. However you could have some tax to pay if you find yourself renovating the house after which promoting it for a revenue. You’d be thought-about to “dispose” of the house at its truthful market worth while 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 transferring in, Vera, the tax remedy could also be thought-about that of a listing sale. On this case, although chances are 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 should in all probability be thought-about 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 just constructed the property as a method to earn revenue. CRA could evaluate the intent behind your renovation and subsequent sale.

Vera, as with all complicated tax conditions, we suggest that you just seek the advice of with a certified tax skilled to evaluate 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 way. He could be reached at adobson@objectivecfp.com.

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

Article content material