Principal Residence Exemption Time Frame

I have a situation whereby a client has sold their principal residence to a developer. The purchase sale agreement has a clause whereby the client can receive a payment in the future (7 years from time of closing) up to $1,000,000 depending on the density the developer can achieve from the city. So when the property was sold in 2018, they received $2.7 Million - I figure that is what gets reported on the tax return. What happens if since that time, the client purchases a new home to live in - new principal residence and two years from now they receive $1,000,000 from the developer? Is that a taxable gain?

The first question I would ask is how much land are we talking here? Can they possibly get 3.7 million for one acre of land?

@obhorst: $3.7 million gets you about 100 square feet in Vancouver… :grinning:

@nFinancial: Your issue appears to primarily be one of Contract Law, so that is where I would start.

It definitely depends what the contract says the money was for. How it is described in the contract will determine how you report it on the return, or if you go back and amend the 2018 return when the payment finally comes through. Get some real advice, and pass the cost onto the client. They should be willing to pay given what the tax on a $1M gain would be!

No tax advise here, but some food for thoughts.

Seems like the contract had two parts:

(a) The sale of the principal residence for $2.7M, which can be exempt with the PRE; and
(b) A speculative or risk-sharing component that can pay up to $1M depending on future commercial success. If this is the correct perspective on it tax-wise, then the question of PRE is simply no. But it does raise the other question of whether it’s on account of capital or income.

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Thanks for the response, we have the same interpretation

My first instinctive interpretation was that it would be considered income

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Interesting thought re amending 2018 return…have to think about that for a while.

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