My question is: Canadian-specific
QUESTION: I have been in a new principle residence for three months. It turns out the neighbourhood is unsafe after dark and I am selling the house and purchasing another in a nicer neighbourhood. The offer I have recieved for this house is significantly more than I paid. Will I be charged a capital gains tax since I have lived in the home such a short time?
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david ingram replies:
To All Questioners:
I am about 300 questions behind right now and not going to catch up.
Usually, I answer about ten questions a day but an Immigration course I am taking at UBC for the Canadian Society of Immigration Consultants is sucking up too much time. Therefore, I am effectively cutting out 300 questions except for a couple that I liked and erasing the rest. However, everyone's name is in the database and you will get a copy of other questions which just might be the same as the one you sent. And since some of the questions are 45 days old, you may have your answer already.
So, anyone is welcome to resend a question.
I am going to start over and limit myself to the three most interesting questions or most different questions I receive. All questions should now go to taxman at centa.com.
I am going to leave davidingram at shaw.ca as a personal family type email address and ignore business mail at this address.
Now to the question about selling the house.
I am repeating a prior question which should answer the three or four different possibilities:
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I just moved into my new condo at XXXXX two weeks ago, my agent is already after me with a price I can hardly refuse. Couple of questions about tax implications. How long do we have to live in a place to qualify for capital gains tax exemption as principal residence. I also read in an income tax self help guide book that in Canada we can sell our principal residence once a year capital gains tax exempt, is this correct?
Thanks.
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david ingram answers:
There is no absolute answer. Each one is based upon the individual facts but let me try.
One: The buying and selling of a house by itself is a venture in the nature of trade and subject to tax at ordinary tax rates. Therefore, if "anyone" buys a house and puts it up for sale when they buy it or fixes it up and sells it, the profit is taxable at ordinary tax rates. i.e. a $20,000 profit would be taxed at the same rate as interest, rents or wages.
Two: If the house was bought to rent out and one rented it out for ten years or twenty years and then sold it for any reason at all, the profit would be considered a capital gain and only 50% would be taxable at normal rates.
Three: But if one bought a house to sell and that was demonstrated by the fact that it was listed soon after purchase and then rented out (because the market dropped) for ten or fifteen years, the CCRA would likely try and tax any profit on the sale as straight income because the "intention" was to flip it which is a straight business income.
Four if one bought a house to live in it and did so for twenty years, it would be a tax free principal residence "UN:ESS" there was a summer cabin or a Whistler ski cabin which they claimed as their tax free residence for the same period. In that case, the cabin is tax free and the house they lived in is taxed at capital gains rates.
Five: If one bought a little house and lived in it for five years and then bought another house because they had twins and needed a larger house, the sale of the first one would be tax free and in my opinion if life's circumstances changed every five years and a family moved every five years because of a life change, each house would be tax free.
Six: However, if one bought a "fixer upper" and lived in it for four years and sold it and bought another fixer upper and sold it four or five years later and then bought another one, etc., the CCRA would likely try and tax the second and third house if the CCRA became aware of the carpentry/renovations part of the sales. Four or five yearfs apart would likely escape the attention of the CCRA but two or three years would likely get their attention.
Seven: If one bought their dream house and were transferred to another city two weeks after they moved in, the sale would be a tax free principal residence sale.
Eight: If one bought a house and someone offered an "unreal profit" two weeks later and they sold, the CCRA would likely want to tax the profit as a straight income. The reason is simple. You might think that because it was an unsolicited offer it is not taxable but that is not the case. There was no reason to sell other than a profit. That fact alone can make it a venture in the nature of trade.
Nine: However, if one bought a house or condo and five days after moving in found out they were pregnant and would need a bigger condo or the penthouse in the same building became available, or they could not stand their neighbour or there was a smell from a pulp mill or their wife was unexpectedly" afraid to walk down the street because of muggers, prostitutes or drug dealers or because she was propsitioned by "johns" every time she went out the door, putting the place up for sale two weeks after moving in and actively soliciting a buyer would likely still leave a tax free principal residence sale.
Another rule of thumb. If the land registry show three buys and sells in a one year period, it has been my experience that the person can expect to have their return scrutinized to see what is been reported. So if you sell your house in May, 2003, buy another in May and sell in June and buy another in July, the CCRA is very likely to take a look.
And, I believe that the answer to the question above is that the CCRA would tax the sale if they spotted it.
If the subject building has had several people buy a condo and flip it (I do not recognize the building's name), then this person is likely to get caught by the CCRA looking at the whole building for flippers.
Log on to www.centa.com, click on tax guide and then on the capital gain section to read a bunch of actual tax cases where a lot of people paid straight income tax on items they wanted to claim tax free.
A direct link would be to http://www.centa.com/taxguide/capital_gains.htm
Last but not least, any self-help book that says you can sell a principal residence every year should be taken off the shelves immediately.
Hope this helps
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