Calculate capital gains tax on a house with a rented basement

Calculate capital gains tax on a house with a rented basement

Fernanda has owned the home for 21 years and is now selling

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Q: I wonder how much tax I should pay if I sell my house for $850,000 in the current market. I bought it in 1998 for $235,000. I rented just my basement for about half of the time I lived in it. I lived in this house for 21 years. Please help me calculate how much tax I need to pay.

 Fernanda

A: The gain on the sale of your home is equal to $850,000 sale proceeds minus $235,000, which is the amount it was originally bought for PLUS any major capital improvements. As you have not mentioned any capital improvements, the gain would be $615,000. From the information you have given us, I am assuming this house is your primary residence.

Under the Canadian Income Tax Rules, the capital gain on the sale of a principal residence is exempt from capital gains tax if the house has been your principal residence for the whole time you have owned it.

Today, with the shortage of accommodation, many people like yourself rent out a portion of their house. Typically, the rental needs to be at a fair market value to be eligible to submit a rental income schedule with your personal income tax return. If you rent to a family member or friend at a rate that was lower than market value, CRA may deny your claim for rental income and expenses, particularly if there is a deficit.

It would be worth your while to consult a qualified accountant to review your past tax returns before filing for your current year’s taxes as this review may impact whether you can claim a full exemption or not. In your case, the rental of a portion of your principal residence will likely not trigger a capital gain especially if your rental activities are close to break even and involve only a small portion of the home–such as a basement—and you have not included CCA (Capital Cost Allowance—CRA’s term for depreciation) in your rental expenses.

Even if you determine that you are eligible for the capital gains exemption, you are now required to report the sale of your principal residence on your personal tax return. Since 2016, CRA has required basic information to be reported including the date you bought the home, sale proceeds and the address of the property.

If you fail to report the sale of a principal residence, you could be subject to a fine. In addition, CRA may usually reassess your returns going back three years, but when it comes to reporting the sale of a home CRA has no limit on how long they can wait to reassess you. Don’t panic if you failed to report the sale of your principal residence, but make sure you file a T1 adjustment as soon as you realize your mistake. Don’t wait for CRA to notice.

Theresa Morley, CAP, CA is a partner with Morley Chartered Accountants in Barrie, Ont. Check out her blog.

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