Have a client that inherited a cottage years ago. Now has moved in full time and sold the principle residence. Prior to moving into the cottage it was torn down and rebuilt at a cost of $300,000. Does she have to report Capital Gains?
No, she just has to report sale of principal residence with the cottage becoming her principal residence.
Actually, obhorst is not correct.
Though the principal residence exemption does apply to the sale of the original residence, there is a DEEMED sale of the cottage property which must be reported at fair market value with the difference between cost (hopefully determined at date of inheritance) and the value at possession date as principal residence being subject to capital gains taxation.
Future gains on the new principal residence will be exempt from taxation.
The only other saving grace is there may be a GST/HST credit available for the ‘substantial’ reconstruction of the building.
Thanks, Randy - I see what you are saying. Hopefully, though, the fair market value of the cottage at date of deemed sale is relatively low since it would probably be little more than the value of the lot.
The GST/HST credit should be available since the cottage was demolished.
Thank you both. Now looking into the GST/HST credit.
The taxpayer acquired the cottage as a Capital property at the value reported on the deceased’s terminal return, and/or the Executor’s Trust statement at distribution date. The taxpayer should ensure that they retain copies of same.
Presuming that the OP states that the cottage has NEVER been used as an income producing property, and has been otherwise vacant, and never rented out at all at any time. (ie S45 is n/a)
For the years that the taxpayer reported another designated property as a Principal Residence, those years are not available to be allocated to a different property.
When the taxpayer dies or otherwise disposes of the cottage as a PR, they will realize a reportable Capital Gain according to the calculation on T2091.