FP Solutions: Will I pay taxes if I rebuild my residence and promote it?

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Q. If I tear down after which rebuild my principal residence of 32 years and promote it with out shifting in, will I’ve to pay any capital good points tax or Harmonized Gross sales Tax (HST)? Is there anything I ought to concentrate on so I don’t get within the crosshairs of the Canada Income Company (CRA)? — Vera

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FP Solutions: To greatest perceive how this transaction could also be taxed, we have to overview a number of concerns surrounding your proposal, Vera. The principal residence exemption (PRE) and its nuances are the primary place to start out.

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• In Canada, to qualify for the principal residence exemption, a property wants to fulfill 4 exams:
• It must be a housing unit, leasehold curiosity in a housing unit, or capital inventory of a co-operative company that permits you to inhabit the unit;
• You should personal the property outright or collectively;
• You, your present or former partner, or kids lived within the property;
• You’ve got designed the property as your principal residence.

Additionally, the dimensions of the property should sometimes be on land that’s not more than a half hectare in measurement, or among the sale proceeds could also be taxable.

In case you reside in and promote the property in the present day, as is, you could possibly stroll away with out having to pay any tax, assuming you haven’t owned one other property the place you claimed the PRE in the course of the time you have got owned your private home, Vera. The problem for the PRE, because it pertains to your proposal, is that your renovation could or could not let you qualify absolutely for the PRE. There are additionally potential gross sales tax implications.

When finishing a substantial renovation, a property could qualify as a newly constructed property if the inside of the house has been gutted and meets the 90 per cent take a look at, which means that not less than 90 per cent of the inside has been eliminated as a part of the method. You don’t essentially must take away components of the construction, equivalent to the inspiration, exterior partitions and flooring, to qualify for this take a look at.

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The secret is to concentrate on the livable areas of the house and whether or not these components add as much as 90 per cent. So, as an example, crawl areas are usually not livable and could also be excluded from the calculation.

In case your “tear down” does surpass the 90 per cent take a look at, then chances are you’ll be thought-about a “builder” for CRA functions and you could have to remit HST or items and companies tax (GST) on the truthful market worth or sale worth of the house. Gross sales tax could apply whether or not you progress in and maintain the property otherwise you promote the property.

Because you lived within the property for 32 years, you wouldn’t be answerable for capital good points tax for these years when the house was thought-about your principal residence. However you could have some tax to pay if you find yourself renovating the house after which promoting it for a revenue. You’ll be thought-about to “dispose” of the house at its truthful market worth once you start the renovation and instantly reacquire it. Renovation prices would improve your price base accordingly.

In case you then promote the property with out shifting in, Vera, the tax remedy could also be thought-about that of a list sale. On this case, although chances are you’ll want the revenue to be tax-free utilizing the principal residence exemption, or taxable as a capital achieve at a lowered tax price, it is going to in all probability be thought-about as absolutely taxable enterprise earnings.

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In case you transfer into the house and subsequently promote it, you should still want to incorporate the proceeds of the sale as enterprise earnings if it may be established that you simply constructed the property as a method to earn revenue. CRA could overview the intent behind your renovation and subsequent sale.

Vera, as with all complicated tax conditions, we suggest that you simply seek the advice of with a certified tax skilled to overview your concerns to have full readability in your tax publicity.

Andrew Dobson is a fee-only, advice-only licensed monetary planner (CFP) and chartered funding supervisor (CIM) at Goal Monetary Companions Inc. in London, Ont. He doesn’t promote any monetary merchandise in anyway. He might be reached at adobson@objectivecfp.com.

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