When you sell property, you realize either a capital gain or a capital loss. A capital gain will occur if you sell your property for more than you paid to acquire it and make improvements, known as capital costs. The opposite is true for a capital loss.
While it would seem like good news to find out you made a profit on the sale of the property, the existence of a capital gain means that you have an additional tax liability.
If, however, the property was your principal residence for all or part of the time you owned it, you may be able to avoid all or some of the liability.
You can only designate one house, cottage, condominium, apartment, trailer or house boat as your principal residence. For the residence to qualify, you must have owned it in the tax years for which you are claiming it as your principal residence and you must have inhabited it regularly.
There are some exemptions, where you do not have to live in the home, but can claim it as a principal residence. For example, if you move and rent out the home, it can usually maintain its principal residence designation for up to 4 years, provided you file the appropriate election.
Problems arise, however, if your principal residence is on your farm land – land (including fixtures on that land) that is used for the purpose of producing income from a farming business, as well as land that is vacant and may not be used directly in a farming business (i.e. bush area).
If you sold your farm, and in turn your principal residence, in 2016 there are certain tax issues you should be aware of.
Land Over One Acre in Size
According to the Income Tax Act (ITA), land that is under half a hectare (one acre) is normally considered part of the principal residence. As such, land over this amount would be excluded and would not be included in an exemption.
Fortunately, a number of taxpayers challenged this rule and won one. So, as long as you can demonstrate that the extra land was necessary for reasonable use and enjoyment, it may be included. Some circumstances which may allow for additional property include:
However, any land which was used for income generation, over the half acre allowance, is viewed as business property and therefore subject to capital gains.
Methods for Calculating the Principal Residence Exemption
If you sold your farmland, which included your principal residence, there are two methods for calculating gains.
Method 1:
Treat the property as two separate portions – the principal residence and the farming business.
To do this, you would reasonably allocate the proceeds of disposition and adjusted cost base to each property then calculate the gain on disposition for each. The farm property would be subject to a capital gain and the home would be exempt, for their respective portions.
Method 2:
Calculate the gain for the total property without allocation.
For this method, you would calculate the capital gain on the total property and then subtract $1,000 from the capital gain, plus an additional $1,000 for each year that the property was your principal residence after 1971.
If you would like help determining which method is best suited for your specific situation, contact us today. We look forward to assisting you.
CRA filing requirements for the sale of principal residences
To claim the principal residence deduction, the CRA requires that you file Form T2091 in the year that you sell your property.
While the CRA only requires this form if the exemption does not eliminate the gain (or where a one-time capital gain crystallization election is claimed on a 1994 return), it is suggested that you file the T2091 to safeguard your exemption, especially if it is questionable whether the whole exemption will be available to you. For example, if you are not sure if you lived there every year the exemption was claimed, or if your property is over the half acre allotment.
For more information on selling your farm land and the application of the principal residence deduction, contact us today!