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Here are some things to keep in mind to avoid finding yourself in the crosshairs of the Canada Revenue Agency when renovating your home
Published on December 27, 2024 • Last updated 6 hours ago • 3 minutes reading time
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If you live in a renovated property today and sell it as-is, you may be able to walk away without having to pay taxes, depending on whether you qualify for the primary residence tax exemption. Photo by Mike Hensen/The London Free Press/Postmedia Network files
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Q Do I have to pay capital gains tax or Harmonized Sales Tax (HST) if I tear down my primary residence where I have lived for 32 years, then rebuild it and sell it without moving in? Is there anything else I should keep in mind so that I don't end up in the crosshairs of the Canada Revenue Agency (CRA)? –Vera
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FP answers: To best understand how this transaction can be taxed, we need to examine some considerations regarding your proposal, Vera. The primary residence exemption (PRE) and its nuances are the first place to start.
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- To be eligible for the primary residence exemption in Canada, a property must meet four tests:
- It must be a residential unit, a leasehold interest in a residential unit or capital shares in a cooperative that allows you to live in the residential unit.
- You must be the sole or joint owner of the property;
- You, your current or former spouse, or your children lived in the property;
- You designed the property to be your primary residence.
In addition, the size of the property must generally not be larger than half a hectare, otherwise part of the sales proceeds may be taxable.
If you live in the property today as-is and sell it, you may be able to walk away without having to pay taxes, assuming you have not owned any other property for which you have the PRE during the time you owned your home have claimed, Vera. The problem for the PRE with your proposal is that your renovation may not allow you to fully qualify for the PRE. There are also possible sales tax implications.
For a major renovation, a property can be considered a newly built property if the interior of the home has been gutted and passes the 90 percent test, meaning that at least 90 percent of the interior has been removed as part of the process. To qualify for this test, you do not necessarily have to remove parts of the structure such as the foundation, exterior walls, and floors.
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The key is to focus on the living areas of the house and whether those parts make up 90 percent. For example, crawl spaces are not habitable and can be excluded from the calculation.
If your “demolition” exceeds the 90 percent test, you may be considered a “builder” for CRA purposes and may be required to pay HST or goods and services tax (GST) on the fair market value or sales price of the home. Whether you move in and keep the property or sell the property, sales tax may apply.
Because you lived in the property for 32 years, you are not subject to capital gains tax during the years the property was considered your primary residence. If you end up renovating the home and then selling it for a profit, you may have to pay taxes. It is assumed that you will “dispose of” the home at its fair market value when you begin renovations and immediately purchase it again. Renovation costs would increase your cost basis accordingly.
If you then sell the property without moving in, Vera, the tax treatment can be considered that of an inventory sale. In this case, even if you want the gain to be tax-free due to the primary residence exemption or taxable as a capital gain at a reduced rate, it will likely be considered fully taxable business income.
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Answers to the CRA's primary residence exemption
If you move into the home and then sell it, you may still have to record the proceeds of the sale as business income if it can be proven that you built the property to make a profit. CRA can verify the intent behind your renovation and subsequent sale.
Vera, as with all complex tax situations, we recommend that you consult a qualified tax professional to review your considerations and gain complete clarity about your tax burden.
Andrew Dobson is a fee-only and advisory Certified Financial Planner (CFP) and Chartered Investment Manager (CIM) with Objective Financial Partners Inc. in London, Ontario. He does not sell any financial products. He can be reached at [email protected].
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