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If you sell your principal residence any increase in value from the date of purchase to the date of sale is generally exempt from capital gains tax. But if you also have a cottage, chances are that capital gains will be taxed when you sell it, because you can only have one principal residence.
Lawyer Yars Pedersen with Miller Thomson’s Regina office came up with several valuable tax tips for owners of multiple properties in a recent company newsletter.
He gives the example of the ‘Smiths’ who bought a house and inherited a cottage in 1999. In 2011, they decide to sell the house, but keep the cottage. It is assumed that the house appreciated in value by $50,000 and the cottage’s value has increased by $225,000.
Although the Smiths do not plan to sell the cottage anytime soon, Pedersen suggests that it may be wiser for them to pay the small amount of tax on the capital gain on their house – an extra $25,000 of income – and preserve the ability to claim the much larger exemption on the cottage at a later timel.
Related: Selling a condo? Beware the tax man
If you are in a similar situation and don’t wish to claim the exemption on your house when it is sold because you want to save it for later, you will have to file a Form T2091-(ND), “Designation of Property as a Principal Residence by an Individual.” Otherwise the Canada Revenue Agency will assume that you are using your exemption to eliminate the gain and you will lose the exemption for the cottage for those years.
Pedersen also says that even if you have to pay capital gains tax on the sale of one of the properties, keeping track of improvements can make a big difference when it comes to deciding whether you should claim the exemption on your house or your cottage.
A deductible improvement is one that must be a lasting improvement to the property. Replacing carpets is not a capital expenses, but adding a new carpet to a floor that had never had carpet would meet the “lasting improvement” test.
Similarly, if the roof was in terrible shape when you bought the property, the cost of a new roof would be a capital cost. But Canada Revenue Agency would not view replacing the roof 15 years after you purchase the property with similar roofing material as a capital expenditure.
In all cases you should get legal and/or accounting advice before deciding which property to designate as your principal residence for tax purposes. Receipts for capital expenses must be kept for at least three years after you have sold the property.
Related: How to decide who gets the cottage