Reduce capital gains tax on the sale of a property

In order to minimize the tax impact, choose the property with the higher annual accrued gain as your principal residence.

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From the February/March 2014 issue of the magazine.

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Q: My wife and I own a home and cottage. I have recently retired and we would like to sell both properties and purchase a home on the water. We were thinking of selling our current home and renting for at least one year, making our cottage the primary residence. Is there any way to avoid capital gains tax?

—Mark Lahey, Ottawa

A: If this were a game of Monopoly I would suggest you pray for a “Get Out of Jail Free” card. However the CRA doesn’t consider this a game, so there is no way to get out of paying capital gains tax. “You have one principal residence exemption for tax purposes that you can use either for your cottage or your home,” explains Deb MacPherson, a partner at KPMG Enterprise. “The exemption is applied on a year-by-year basis and requires you to choose, for each year, which property you’ll designate.”

In order to minimize the tax impact, her advice is to designate the property with the higher annual accrued gain. She says you can also reduce the gain by making sure that improvements to the property and costs related to its sale, such as legal and real estate fees, are added to your adjusted cost base. MacPherson notes one final caution: Be sure to “keep your receipts for improvements in case you’re audited.”

Bruce Sellery is a speaker and author of The Moolala Guide to Rockin’ Your RRSP. Do you have your own personal finance question? Write to us at ask@moneysense.ca

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