Tax Tip Thursday

A few weeks ago, we talked about maintaining your principal residence exemption for a rental property. Then last week, we talked about what currently is and what could be your principal residence. This week I will continue the theme and will talk about severing land or selling vacant land, as well as the tax implications of doing these things!

I got a call about this last week from a poker buddy. He wanted to know if you have a house on a double lot and you subdivide the second lot to sell it, will you have to pay taxes? The short answer is… it depends!

The key for capital gains on the sale of any property is to be eligible for the principal residence exemption.

Principal Residence Qualifications

In order for a property to qualify for the principal residence exemption (PRE) from capital gains tax, it must meet four criteria:

1. It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation.
2. You own the property alone or with another person.
3. You, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year.
4. You designate the property as your principal residence.

If the additional land is not considered part of your principal residence, whether it is subdivided or not, a sale may be subject to tax on the capital gain if it appreciates in value.

How Do I Know if I Owe Taxes on the Sale?

In the following situations, the sale of vacant land by an individual WILL attract HST:

1. The sale of land that is capital property that had been used primarily in a business;
2. The sale of land in the course of a business; or,
3. The sale of a parcel of land created by subdividing another parcel into more than two parts.

Most sales of vacant land by individuals are HST tax free. Here are a few examples of such sales:

1. The sale of land that had been kept for personal use; or,
2. The sale to a relative (or to a former spouse or common-law partner) for their personal use of a parcel of land created by subdividing another parcel.

To help you understand better, here are some questions and answers I have put together:

Q: If I inherit a piece of land from an estate and now want to sell it to a developer, do I have to charge HST and will there be capital gains?

A: In this situation you likely do not have to charge HST because the land is not capital property and it will not be sold in the course of business. Since you inherited the land and did not purchase it, you should not be considered to have sold the land in the course of an adventure or concern in the nature of trade. If it is vacant land, then there will be capital gains.

Q: If I own a parcel of land and want to subdivide it to sell the parts separately, do I have to charge HST and will there be capital gains?

A: If you have never subdivided the parcel of land in the past and you subdivide the parcel into only two parts, the sale of either of those parts is exempt from HST. Again, you will be subject to capital gains.

If you subdivide it into more than two parts, the sale is subject to HST. However, if you sell any part to a relative, that particular part is not subject to HST.

Q: I have severed a portion of land that previously formed part of the parcel of land on which my house is located. I have never previously severed any portion of the land, nor have I ever leased any portion of the land or used it for other commercial purposes. Would GST/HST apply to the severed portion and will I have to pay capital gains?

A: The sale of the severed portion of vacant land would not be subject to GST/HST since it is not capital property used primarily (more than 50%) in a business and it is not being sold in the course of a business. However, if the land was subdivided into more than two parts, sales of the severed portions are not exempt unless the portion is sold to a relative (or to a former spouse or common-law partner) for their personal use. No capital gains would occur.

Q: I own a parcel of vacant land that I have never previously subdivided or severed. I have always used it for personal use and I now intend to sell it for retirement income. I subdivided the vacant land into six lots and I am selling a lot to each of my two children, one lot to a friend, and the remaining three to a developer. My children are acquiring their lots for personal use. Does GST/HST apply, and will there be capital gains?

A: GST/HST does not apply to the sales of the lots to your children even though the parcel is severed into more than two lots. However, the GST/HST applies to the sales of all the remaining four lots (one to a friend and the other three to a developer). Capital gains would apply to all.

Still have questions?

No problem. You can check out this Government of Canada site for more information, or if you’d rather have someone help you apply this to your specific situation and guide you to the best possible outcome, give us a call or make an appointment!

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.