It is important to understand that the information provided here is for information purposes and not advice. You should consult your tax, legal, real estate and mortgage professional.
Mike bought his condo in 2009 when he was working with ABC Company downtown Toronto. He was 26 years old with 3 years work experience, working towards his Chartered Accountancy designation. He purchased a great deal, a 700 sq ft 1 bedroom plus den and parking spot for $240,000. He was excited to live downtown in his first condo. A year later he met Sue who swept him off his feet.
Today in 2011, the condo is coming up for occupancy and Mike is engaged! He is busy planning a wedding and looking forward to move in together with Sue into their first home in the suburbs in a year. Mike needs to sell what should he do?
It is important to understand the market at this time and some basics in accounting.
Today the condo is worth about $500 per sq ft or $350,000.
Here is the breakdown of the purchase at closing:
Contract price $240,000
Deposit 15% of contract $36,000
Builder closing costs $5,500
CMHC Insurance premium 1.75% $3,570
Mortgage amount $207,570
Ontario land transfer tax $2,125 (assume first time buyer credit disqualified)
Municipal land transfer tax $2,125
Legal costs $1,400
Here is how the breakdown of the sale:
Sale price $350,000
Commission 5% $17,500
Legal costs $800
Mortgage penalty $1,500
Mortgage amount $207,000
To calculate Capital Gain, subtract the Adjusted Cost Base (ACB) and Disposition Costs from the Sale Proceeds.
The ACB is overall cost of buying the condo, which is the price plus all closing costs. In this case it is $254,720.
The Disposition Costs are $19,800.
The Sale Proceeds are $350,000.
Thus the Capital Gain is $350,000 – 254,720 – 19,800 = $75,480.
How is the Capital Gain treated? According to Canada Revenue Agency (CRA) the capital gain on your principal residence is tax exempt, so tax free!
If the seller had an intention to own it as a rental/flip property and then sold it, then the capital gain is 50% taxable.
If the seller is in the business of flipping property, then the capital gain is consider business income and is 100% taxable.
So which scenario does Mike fit in?
How CRA qualified intention is a very exhaustive exercise, which I will be talking more in depth in my book. The key here is that Mike intends to make this condo his home.
Mike moves into the condo during occupancy with his fiancé; they make it home. Shop for a new home, get married then sell. When he sells he qualifies for the Principal Residence exemption and will receive $75,480 tax free!!!
Otherwise, if he chooses not to live there and flip the condo the capital game would be 50% taxable which could be a very expensive lesson.