As per CRA guidelines, individuals (Note: Couples- are considered one individual) are entitled to have only one principal residence. Thus, cottages and/or recreational properties are usually subject to taxes on capital gains resulting on the sale of these properties. However, a good chartered accountant in Toronto will advise you to claim the principal residence exemption on the property that has the highest amount of capital gain from its sale.
TAX TIP: It may be worthwhile to pay a small amount of tax on the capital gain on your principal residence (Home), if the tax savings in the long run will be greater to elect your cottage or recreational property at the time of sale. If you do not want to claim the exemption on your house when you sell it (as you want to save it to a later date) than you need to file Form T2091-(IND), “Designation of a Property as a Principal Residence by an Individual.” If you fail to file this form, the CRA will assume that you are using your exemption to eliminate the gain, therefore, you will not be able to use it for another property for those years.
Alternatively, at a time where home renovations and improvements are ever so popular, it is important to get in the habit of keeping good records of the capital costs you put into your principal residence and cottage and/or recreational properties. A capital expenditure that is made will reduce the amount of any future capital gain, as the capital expenditure can be added to the initial purchase price to come up with a adjusted cost base for the property upon sale. One important detail to note is that the capital expenditure must be a lasting improvement, that is, something that the owner will benefit from for more than a year and considered a significant change. For example, replacing a pre-existing wall to wall carpet is not considered a capital expenditure (not a significant change) however replacing carpeted floors with hardwood flooring would be considered a capital expenditure and thus can be added to the original purchase price of the property. Lastly, please keep all capital expenditure receipts for at least 3 years after you have sold your property.
It is very important to have a good chartered accountant in Toronto or Mississauga to advise you on how to split your principal residence exemption between your home and cottage and/or recreational property in order to pay the least amount of tax.
SRJ Chartered Accountants are Chartered Accountants in Toronto & Mississauga who specialize in helping individuals and corporations reduce taxes and tax planning. If you want to learn more about how we ensure you pay less tax and for additional tax tips contact us at firstname.lastname@example.org or 416-898-4235.