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Discussion Starter · #1 ·
Hello,
What if a person bought a 2nd home (cottage) in 1972 for personal use and then sold their principle home in 1993 and moved to the cottage fulltime as the principle home until it was sold in 2020. Would Capital Gains on the 2nd home (cottage) only apply from 1972-1993 and remaining years 1993-2020 would be tax except as it was principle home? If so, how is that calculated in the tax return? Is it a "deemed disposition" in 1993 and a Fair Market Value estimate is used to calculate Capital Gain or is it a "change of use" declaration in 1993 and same FMV estimated is used for capital gains calculation? Does any one know the logistics on how to file this in the tax return?
Thank you
 

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If you have 2 properties , you can claim either property as the principle residence for any period but only one PR /person/year. The property just has to meed the CRA criteria to qualify


The best option is to claim the property w the greatest capital gain.
 

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The act reads that a couple could each have a PR only if they weren't living in the same family unit. ie If your spouse lived in another house. For 1982 and later years.

"Furthermore, no other property may have been designated as the principal residence of any member of the taxpayer’s family unit for the year. "

Sec 2.13

 

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Discussion Starter · #5 ·
Hi All, thank you for your responses, really appreciate it.

However, the specific question for this scenario is... does Capital Gains only apply to years 1972-1993 when the cottage was a 2nd property and not the principle residence? If so, how is that calculated since the home was not sold in 1993? Is there a FMV estimate required in the calculation to determine how much the property value increased in years 1972-1993 vs. the tax exempt years of 1993-2020 when it was a principle residence?

Thank You
 

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does Capital Gains only apply to years 1972-1993 when the cottage was a 2nd property and not the principle residence?

T2091IND "Designation of a Property as a Principal Residence by an Individual" basically amortises the gain over the years owned and makes the years when not a PR taxable. One gets to move one extra year into the non-taxable PR category. This form takes into account the 1971 through 1982 rules also. Have a look.
 

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Discussion Starter · #7 ·
Thank you gardner. I just found a couple articles that imply the owner would be tax exempt for all gains between years 1993-2020 based on a Fair Market Value evalutation in 1993 (the time the 2nd home became the principle residence). These are the articles... Capital gains tax: Declaring a new principal residence and How Much Will I Owe in Capital Gains Tax?

Does this make sense to you guys? It does to me, but am struggling how to capture this calculation within the tax return.

Thoughts?
 

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The cottage property will be exempt from capital gains tax during the time you declare it as principal residence. It is only subject to capital gains tax for the time it was not designated as your PR. You don't need to determine the FMV when the use was changed in 1993. It is calculated based on pro-rating the capital gains only for the time it was not used as your PR.

The t2091 form to which gardner linked explains how to calculate the capital gain and prorate it for the years not designated as your PR. I'm not familiar with the rules prior to 1982, but the form explains that too.
 

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I think gardener and Greatlaker have covered it

Generally, from 1972 to 1993 you can declare either your home or cottage the PR. I'm thinking though you would have had to declare the house as the PR or else you would have had to file a capital gain back in 1993 when it was sold.

1) Declare cottage the PR.
Then you will have to report a capital gain on the house. I think you may have had to declare the house only as your PR . Again if not you would have had to report a gain on the house from 1972 to 1993 back in 1993.

2) Declare the house as PR.
Then you are ok. No capital gain on the house to declare. The cottage is now the PR. Now as you sold the cottage you will have to declare a capital gain but just from 1973 to 1993 and follow the CRA Guide for prorating
 

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jt23 said:
What if a person bought a 2nd home (cottage) in 1972 …
Great timing … that was the year capital gains tax was introduced.

When you own multiple personal use properties, you are allowed some discretion as to which one you assign the PR exemption to … so back in 1993, you had a choice …. you could either …
(a) Claim the PRE for the home you sold; or​
(b) Pay cap gains tax on the home you sold, so as to reserve the PRE for future use on the cottage.​
Most people would choose (a) because the tax savings are immediate, even if the embedded gain on the cottage at that point was greater. I assume that’s what you did.

For the cottage, I believe it’d be a straight pro-rata split of PR/non-PR time periods … you held the cottage for 48 years, all of which would be eligible for PRE if you hadn’t already assigned PRE to some other property … but you did, so only 27 years remain eligible for PRE as a result … therefore, calculate cap gains the usual way, and prorate the gains as 27 / 48 = 56% exempt and 21 / 48 = 44% non-exempt.

Retiredguy said:
I think it was 1982 a couple could each have a designated PR.
1982 was the first year a couple could only have one … the double-PR ended in 1981

Jimmy said:
The best option is to claim the property w the greatest capital gain.
Not necessarily, if it means paying the tax 27 years sooner.
 

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Discussion Starter · #13 ·
All, thank you for the responses. Some additional background for everyone to understand why I'm pushing for a FMV calculation in 1993 due to "change of use"...
In 1993 the FMV value of the cottage was actually less than the investment cost (i.e. purchase + upgrades). That was due to the real estate market crash between 1989-1993. So essentially the cottage had a Capital Loss between 1972-1993 and all Capital Gains of the cottage were actually realized between 1993-2020. If the calculation forces me to prorate the capital gains across all years of ownership and then apply to only years it was a second home 1972-1993, I would inherently pay for Capital Gains between 1972-1993 for gains that were not realized during that period. Does that make sense? I'm struggling to pay Capital Gains for those years when the gains were not realized in those years. The "change of use" calculation which takes into consideration FMV in 1993 would address that issue. However, the "change of use" in 1993 was only from "2nd home" to "Principle Residence", so not sure if that applies to CRA's definition of "change of use". If it does I think I'd would be good to go.

Thoughts?
 

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Unfortunately the 'change in use' per their rules I am pretty sure only applies to changing from an income producing property (ie a rental or business) to a PR or vice versa.

Please see sec 2.48-2.57

 

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Discussion Starter · #15 ·
The confusing part for me is that both of these articles Capital gains tax: Declaring a new principal residence and How Much Will I Owe in Capital Gains Tax?
state that "According to the CRA a deemed disposition is a change of use in a property. In your case, you changed the use of your vacation property (to your primary residence) after you sold your home and moved in to the vacation property. From a tax perspective, you owe tax on any price appreciation in the first 14 years you owned the property. However, for the remaining 14 years—when you lived in the property as your principal residence—any appreciation in value is exempt from capital gains tax."
 

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The confusing part for me is that both of these articles Capital gains tax: Declaring a new principal residence and How Much Will I Owe in Capital Gains Tax?
state that "According to the CRA a deemed disposition is a change of use in a property. In your case, you changed the use of your vacation property (to your primary residence) after you sold your home and moved in to the vacation property. From a tax perspective, you owe tax on any price appreciation in the first 14 years you owned the property. However, for the remaining 14 years—when you lived in the property as your principal residence—any appreciation in value is exempt from capital gains tax."
Please do not consider articles by realtors on tax matters to be an authoritative source.
 

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I think the current rules for principle residences came into being in the 2016 tax year. At least one of the articles predates the regulation change. I suspect a change of use designation might lock in the new ACB for T2091 purposes, I am not sure.
Incorrect. The new rules related to filing of Form T2091. The change of use rules relate to changing a personal use property to a business or rental property or vice versa.
 
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