If someone lived in their home for a number 25 years and then purchased a new property which they occupied as their principal residence, while renting out the first, how are both properties taxed?
There is an exemption for a principal residence. As between a husband and wife you can only have one (after 1981, before that 2).
There is a “capital gains tax” which applies in many cases. If you have several properties, then, you are in the “renting business” and 100% of the net proceeds will be treated as income in the year of disposition.
If you have a principal residence from 2000 to 2015, and then you rent it out and sell it in 2023, then the first 15 years are exempt, tax will be payable on the gain between 2016 and 2023. Hopefully (depending on prior businesses) this will be treated as a capital gain. 50% of the capital gain will be brought into income in the 2023 taxation year. The tax payable will likely be 25% of the total gain after deducting expenses.
CRA will place more value on an appraisal completed in 2016 when the change in use took place over the 2023 opinion of the value in 2016, which would be expected to be rather self-serving.
There is no deemed disposition. It is only the actual 2023 disposition which triggers the tax liability. So, you need an adjusted cost base in 2016 and keep track of all your expenses from 2016 to 2023. You will be able to deduct 50% of them to reduce your overall tax liability.
As for house #2, it’s exempt from start to finish. There’s also a crossover year, since it’s quite unlikely that the purchase and sale would actually take place on 1 January. So, from a technical perspective, you could actually have two properties, both of which qualified under the principal residence exemption in any one taxation year.
Brian Madigan LL.B., Broker