A popular regular feature in Good Times magazine is “Your Questions,” where Olev Edur provides answers to questions from our readers regarding their rights, personal finance, and estate planning. Here’s one on the importance of keeping documents for tax purposes.
Q. About 20 years ago, my wife and I purchased a year-round waterfront property in Nova Scotia, and when we retired in 2011, it became our principal residence. Originally, the deed described the property as being two lots joined, totalling about two-and-a-half acres. The tax bill had a single civic number and address. But in the tax year 2011, I began to receive two tax bills, one for the original address and another with a newly created civic number and address. As a result, our property tax bill suddenly doubled.
Our question is, having originally purchased these two lots as one deeded property, when we sell, will both lots still be exempted from capital gains tax under the principal residence exemption?
A. On the face of it, your description certainly leads to a conclusion that both lots have always constituted a single property for income tax purposes. The fact that the civic authorities decided to make an administrative change (which happened to double their revenues) shouldn’t affect the property’s federal/provincial income tax status as a single, undivided home.
On the other hand, there’s no ironclad guarantee that the Canada Revenue Agency (CRA) won’t try to disallow an exemption claim on what has now been categorized by the local authorities as two properties. The government probably wouldn’t win in court, but the CRA has been called to task in the past for overzealousness, so make sure you hold onto all your documentation (including the original tax bills for the single property) just in case.
Presumably, too, you’re aware that capital gains on the property, from the time you bought until the time it became your principal residence, will be subject to tax. As a result, you should be retaining all invoices and receipts for improvements and additions made to the property since you bought it, as these may be deductible from your eventual capital gains tax bill.
And finally, real estate transactions can be complicated at the best of times, and yours has some added wrinkles, so I suggest that you enlist the services of a lawyer who’s well versed in real estate taxation.