Q: I want to know how to avoid paying tax on a land sale. In 2000, I bought 100 acre parcel of bush land for $30,000. At the time I didn’t own a home; I was renting. In 2003 I bought my first home and then sold it in 2008. I have not owned a home since 2008; renting the entire time. Now, I’m considering selling the land so that I can buy a house. If the land is worth $150,000 today, how would I calculate capital gains tax owed?
— Farah, Vaughan, Ont.
Ayana Forward is a Certified Financial Planner with Ryan Lamontagne Inc. in Ottawa:
Unfortunately, if there was no housing unit on the land, the principal residence exemption cannot be used.
Your capital gain is the selling price ($150,000) less the adjusted cost base ($30,000). Your capital gain would therefore be $120,000, of which 50% is taxable.
Ayana Forward is a real estate investor who also holds the Certified Financial Planner (CFP®) designation. Ayana is fee-based Financial Planner with Ryan Lamontagne Inc in Ottawa, ON.
Romana King, senior editor and real estate specialist at MoneySense:
In order to shelter the profit of property sale the real property must comply with the rules of what qualifies as a principal residence, as stipulated by the Canada Revenue Agency.
In a nutshell, any residential property owned and occupied by you or family at any time in a given year can be designated as a principal residence. So, if you own and live in a detached or townhouse, a condominium, a cottage, a mobile home, a trailer or even a live-aboard boat, you can designate the property as your principal residence.
Here’s the thing, because the principal residence can only be applied to a property you “ordinarily inhabit” there must be some sort of dwelling on the property that you can occupy. No dwelling, no tax exemption.
Now, if you did have a dwelling on the property, you still couldn’t avoid paying tax. The CRA restricts the amount of land that can be sheltered from tax using the principal residence exemption. The size of land, where your primary home sits, cannot be greater than one-half hectare (or 1.2 acres) of land. So, if you bought a 10-acre farm and lived in the farmhouse, you wouldn’t have to pay tax on the appreciated value of the farmhouse or on 1.2 acres of the land—because they’d qualify for the exemption. You would, however, have to pay capital gains tax on the appreciated value of the remaining 8.8 acres. Now, the CRA has said that you can get apply for a tax exemption on parcels of land that are greater than 1.2 acres, but you will need to prove to that the additional land was required for your use and enjoyment of the property.
If, however, the land was used to produce an income—such as farmland—you could explore whether or not you could shelter the taxable gains from the sale of the land through the CRA’s lifetime capital gains exemption for qualified farm or fishing property. Any sale of property on or after April 20, 2015, could be eligible for a capital gains exemption (LCGE) up to $1 million.
To qualify as farm property the land must have real or immovable property and eligible capital property used in the course of carrying on the business of farming in Canada. By the sounds of it this land sat vacant over the years; this makes it ineligible for the farm lifetime capital gains exemption, as well.
Romana King is a real estate specialist at MoneySense. She is also a licensed real estate sales agent. Follow her on Twitter (@RKHomeowner) or on Facebook. If you have real estate concerns or questions, please email Romana directly at [email protected]