As a result, when you sell or transfer your cottage, or upon the death of you or your spouse, capital gains tax must be paid. You may be able to shield part or all of the increase in value from tax by claiming a primary residence exemption.
This exemption can apply to any property you use regularly, including a cottage. It is not limited to your home. However, you and your spouse can only have one primary residence per year, so applying for a primary residence exemption for your cottage may expose your property to taxation at a later date.
How renovations count towards capital gains
Any renovation done to a cottage can also diminish its ultimate value, John. This also applies to the purchase costs (transfer tax, legal costs, etc.) and sales costs (real estate commission, legal costs, etc.). Half of a capital gain is taxable, calculated on the sale price less the adjusted cost basis less transaction costs. A large capital gain can put you in a high tax bracket of more than 50%, resulting in tax to be paid on more than 25% of the total profit.
The FMV, or fair market value, of a house often needs to be determined. This may apply if ownership of a property is transferred to a family member, to certain types of trusts, or upon the death of a taxpayer. The FMV should be calculated from February 22, 1994 to determine the accumulated capital gain on your house if form T664 was submitted at that time.
FMV for real estate can be estimated, but is likely to be more reliably determined by a professional appraiser. The cost of a professional appraisal can be relatively modest, in the hundreds of dollars, or more expensive for more unique types of real estate.
Earn a chunk of capital gains
When you sell a house, you generally have a large added value all at once. There is an exception if you are paid for the sale proceeds by the buyer over a number of years. In this case, you can claim a capital gains reserve, but you must put in at least one-fifth of the capital gain in income each year, even if you receive less than one-fifth of the proceeds.
This can be difficult to arrange with a typical buyer, but if you are considering selling or transferring it to a child or other family member, or selling it to a neighbor, it may be more feasible.
Is CRA T664 retroactive?
To answer your question, John, this is not a retroactive election currently available to you. Canadians who did take advantage of the 1994 capital gains exemption may have been able to exempt up to $100,000 in capital gains tax. Even taxpayers with more than $100,000 in deferred capital gains can use the exemption to increase their cost base by $100,000. Those who have applied for the exemption in the past, or whose relatives may have applied for it, can confirm by contacting the Canada Revenue Agency (CRA).
This post Understanding the 1994 Capital Gains Tax Election
was original published at “https://www.moneysense.ca/columns/ask-a-planner/understanding-the-1994-capital-gains-tax-election/”