Is there VAT on the sale of land?
First, when you sell property, including vacant land, Devon, there may be income tax implications such as capital gains tax, as well as GST/HST sales tax implications. In general, the sale of a primary residence is exempt from income tax.
How does the main residence exemption work?
Now, to qualify for the capital gains tax exemption for the principal residence, a property must meet four criteria:
It is a housing unit, a long lease interest in a housing unit or a share in the capital of a cooperative housing corporation that you acquire only to acquire the right to occupy a housing unit of that corporation. You are alone or together with another owner of the house. You, your (former) spouse or cohabiting partner, or one of your children has lived in it at some point in the year. You designate the house as your main residence.
Assuming the property meets these criteria, Devon, there is further consideration with regard to the land. In general, if the area is less than 0.5 hectares (1.24 acres), it can be part of your main residence. If the plot is larger, but you can demonstrate that the additional land is needed to enjoy your home, consider the entire property as part of your primary residence. An example of this is if the municipality had a minimum plot size of more than 0.5 hectare when purchasing the house.
If the additional land is not considered part of your primary residence, whether divided up or not, a sale may be subject to capital gains tax if it increases in value.
I assume, Devon, the area in your case is less than 0.5 acres. While it’s unusual for most homeowners to sell part of your primary residence, it seems you’ve done that successfully here. The proceeds should therefore be tax-free.
Reporting capital gains and sales of the property
You must report the transaction on Schedule 3 of your income tax return, specifically on Form T2091. You report the proceeds of disposal (the amount for which you sold the house); the expenses and expenses related to the disposition (such as real estate commissions paid and legal fees); your adjusted cost basis (a prorated allocation of your purchase price for the property); the years that you owned the house; and the years that you declare it as your primary residence.
Any time you buy and sell real estate in a short period of time, there is a risk that the Canada Revenue Agency (CRA) will consider the transaction as real estate. Selling a property you acquire with the primary intent to make a profit could result in a primary residence claim being denied and the proceeds being taxable as business income.
Sales tax on the sale of fallow land
The transaction could also give rise to GST/HST sales tax payable to CRA. Sales tax may apply if you are deemed to have flipped the property and have taxable business income on the sale. Vacant land is generally exempt from GST/HST if the land was for personal use or if it was sold to a family member for personal use.
This post Capital gains on parceled land and HST on undeveloped land
was original published at “https://www.moneysense.ca/columns/ask-a-planner/capital-gains-on-subdivided-land/”