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A couple of years ago I bought some lake front property really cheap. Over the past couple of years I've been slowly building a cottage on it. I didn't even think about capital gains until someone brought it up just recently. I understand how capital gains works if you buy a cottage then sell it. But how does it work if you just buy property then build on it?
My understanding of capital gains is that you are taxed 50% on half of the total earnings.
In my case, I bought the property for $30,000. If I sold the cottage when I am done, I can probably get $200,000. Doing the capital gain calculation on that and I owe $42,500 in taxes when I sell. Is that right?:confused:
 

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Actually, your adjusted cost base would be $30,000 for the land alone.
Keep track of how much it has cost you to build the cottage, as that total will be the adjusted cost base for the building- example $80,000 in total just to build the cottage.

When you come to sell, you would prorate the $200,000 between the land and the cottage. Find out what would be reasonable in that area for land only. Suppose it was $50,000 just for the land.

So your capital gain would be calculated as follows
LAND: 50,000 - 30,000 = 20,000
COTTAGE: 150,000 - 80,000 = 70,000

Total capital gains = 90,000
Taxable capital gains = 45,000
How much tax you pay on that 45,000 depends on your tax bracket at the time.

When you deal with land and building, CRA likes to have it broken down between the land and the building (even though the capital gains turn out the same).

Clear as mud?
 

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i had never thought of this situation, and have no expertise to present, just an overall wish to see justice in taxation. (!!!!!)

but there seems something unjust and bizarre in being taxed - as eventual capital gains - on one's own unpaid labour. So far, what is being suggested is that only the cost of materials purchased can be claimed as a cost base.

note that star's suggestion has already cut Cottage Builder's notional capital gains tax percentage by 50%, so it's a case of so far, so good. Perhaps other suggestions can improve the situation further for our handy homebuilder.
 

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i had never thought of this situation, and have no expertise to present, just an overall wish to see justice in taxation. (!!!!!)

but there seems something unjust and bizarre in being taxed - as eventual capital gains - on one's own unpaid labour. So far, what is being suggested is that only the cost of materials purchased can be claimed as a cost base.

Think of the flip side of the coin. What if people could add the "value" of their own labour to their cost base. People would add any amount they wanted. You could value your labour at $10,000,000,000 and have a massive capital loss.

No one would ever pay capital gains because they could arbitrarily inflate their ACB to whatever they wanted. How "just" would that be?
 

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When it comes to your own labour, CRA ignores any value you might put on it- whether you are building a recreational cottage or maintaining a rental property or maintaining a business property.

In order to use labour costs as part of the capital cost or as an expense, you must pay a third party and have the receipts to back it up.

Even for the home reno tax credit, your own labour doesn't count, just what you pay a third party at arm's length and the materials.
 

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Not really related, but kinda......

When we moved into our new home my city wanted to know how much I ended up paying for my house, because "you built with a custom builder and probably paid more, so you should be assessed higher".
WTF?:eek:

I then asked her what happens if I did most of the labour myself, saving tens of thousands of dollars, thus I should be assessed lower, and thus pay less property tax?

She replied it doesnt work that way because people would take advantage of the system and thats why they asses value based on fair market value.

I then asked why she wanted to know what I ended up paying? Just because I add for example 50K for exotic kitchen cabinets (I didnt) doesnt mean the house is worth 50K more. A house is worth what someone will pay for it.

Then silence........

Bueller?
Bueller?
Bueller?
:D
 

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I then asked her what happens if I did most of the labour myself, saving tens of thousands of dollars, thus I should be assessed lower, and thus pay less property tax?

She replied it doesnt work that way because people would take advantage of the system and thats why they asses value based on fair market value.
Heads they win, tails you lose.
Playing against the tax man is like playing soccer against the best team, at their home ground, with their referees, and only their fans allowed in the stadium.
And, btw, you are not allowed to have a goal-keeper.
 

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The same issue is present in self-employment. If you own a corporation, you add value to the enterprise as a result of your own labour (both tangible and intangible).

The "cost" or value of that labour is not deductible to the corporation, and the realized value added to the corporation is taxable in its hands, and in your hands if you withdraw some in the form of dividends.

Just a note to add that this paradigm is present in the Canadian tax system writ large, not just in the purchase of a principal residence or a cottage. It is worse for corporations though, as the gain is not tax-free (as it is for a principal residence).
 
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