Weekly Tax Tips
Vacation Properties and Capital Gains - Remember to Track Your Costs
Date: 13 Aug 2010
As most Canadians know, the capital gain that you may realize when you sell your home is exempt from tax. Under our tax rules, a family unit (generally you, your spouse and your minor children) can exempt a gain from one residence only (before 1982, each taxpayer in a family could exempt one property that they own). If you or your family unit owns more than one property, this means that some tax will be payable on the gain from one property when it is sold. Often, tax is paid on the sale of the property with the lower value (on the assumption that the gain is lower on that property) and this property is often the vacation property.
So, because the gain on your vacation home may be taxable in the future, it is important to keep track of the cost to acquire the property - both at the time of purchase and for any improvements made. The higher your documented cost, the lower the gain when you sell. So, be sure to track these costs and keep receipts. And, remember to keep in mind that some items may be difficult to categorize in terms of an expense vs. an improvement. Unlike normal tax planning for income calculations, you'll want to justify (within reason) as many expenditures as you can as improvements as opposed to operating costs. The key test is whether the expenditure maintained or returned the property to its original condition, or the expenditure made the property better than it was previously.
This tax tip is a publication of BDO Canada LLP on developments in the area of taxation. This material is general in nature and should not be relied upon to replace the requirement for specific professional advice. The information in this tax tip is current as of 13 Aug 2010.