Dean Constand
   Certified General Accountant
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        Newsletter Page 4 - Toronto Certified General Accountant

      Newsletter #10 December 2010

Personal Income Tax (Cont'd)

      The Principal Residence Exemption (Cont'd)

      Option 1 (Cont'd)


      Given that (2) above uses a fraction of 7/6, it is wasteful to designate the cottage for all its years of
      ownership. The cottage would still have a zero capital gain if it was designated as a principal
      residence for 5 years (2006 to 2010) instead of 6 years. This allows you to increase the exempt
      portion of the gain to the house by designating the house for 34 years (1972 to 2005) instead of 33
      years as follows:

  1. 1 + 34/36 = 35/36 x gain on house is exempt portion of gain on house
  2. 1 + 5/6 = 6/6 x gain on cottage is exempt portion of gain on cottage
      In other words you can exempt all of the gain on the cottage from tax, but a fraction of
      35/36 or 97% of the gain on the house in 2010 would be exempt, which means paying
      tax on 3% of the gain on the house at your marginal tax rate.


      Option 2

      You can choose to designate the house as the principal residence for all its years of ownership from
      1972 to 2007 or 36 years. The cottage in this example would then be designated as the principal
      residence for 3 years, from 2008 to 2010, for only part of its years of ownership from 2005 to 2010
      or 6 years.

  1. 1 + 36/36 = 37/36 x gain on house is exempt portion of gain on house
  2. 1 + 3/6 = 4/6 x gain on cottage is exempt portion of gain on cottage
      However, as in option 1, it would be wasteful to designate the house for all its years of ownership,
      therefore,

  1. 1 + 35/36 = 36/36 x gain on house is exempt portion of gain on house
  2. 1 + 4/6 = 5/6 x gain on cottage is exempt portion of gain on cottage
      In other words you can exempt all of the gain on the house from tax, but a fraction of
      5/6 or 83% of the gain on the cottage in 2010 would be exempt, which means paying
      tax on 17% of the gain on the cottage at your marginal tax rate.

      Given the calculations are complex, your accountant should be consulted to determine
      which property generates the higher exempt capital gain.

      Stay tuned….

      My next newsletter will discuss planning for the succession of your cottage.


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      Dean Constand C.G.A. publishes this newsletter for information purposes only. Feel
      free to distribute to colleagues and friends. Although the material has been carefully
      prepared, it is not a substitute for professional advice.
Dean Constand (Toronto Certified General Accountant)                                       Email Contact: accountant@deanconstandcga.com

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