The article “Capital Gains On Subdivided Land” was originally published on MoneySense on January 18, 2021.
Devon was lucky enough to buy a lot that he was able to subdivide, sell some of the land and build a house on the rest. Does he owe tax?
Q. Our primary residence of three years is built on a double lot. We received a partial discharge of our double lot and built our house on it for cash. Do we have to pay any capital gains? We did not plan on doing this when we first purchased.
A. In order for a property to qualify for the principal residence exemption from capital gains tax, it must meet four criteria:
- 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.
- You own the property alone or jointly with another person.
- You, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year.
- You designate the property as your principal residence.
Assuming the property meets these criteria, Devon, there is a further consideration related to the land. Generally, if the land size is less than 0.5 hectare (1.24 acres), can be part of your principal residence. If the land size is larger but you can demonstrate that the additional land is needed to enjoy your home, you can consider the whole property part of your principal residence. One example of this is if the municipality had a minimum lot size that exceeded 0.5 hectare when you bought the property.
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.
I will assume, Devon, that the land size is less than 0.5 hectare in your case. Although, for most homeowners, it is unusual to sell a part of your principal residence, it appears that is what you have successfully done here. As such, the proceeds should be tax-free.
If you buy and sell real estate in a short period of time, there is a risk the Canada Revenue Agency (CRA) considers the transaction to be property flipping. Selling a property that you acquire with the primary intention of generating a profit could result in a principal residence claim being denied and having the proceeds taxable as business income. The transaction could also give rise to GST/HST sales tax payable to CRA. It does not sound like that would apply in your case, Devon, but it is a consideration for some readers.
Subdivided land can result in GST/HST payable on the land. As long as you have never subdivided the vacant land, and subdivide it into only two parts, the sale of either of those parts should be GST/HST exempt. This further assumes the land is not capital property used primarily (more than 50%) in a business, and is not being sold in the course of a business; this would typically not apply to a principal residence.
Lots like yours are hard to come by in many municipalities, Devon. It sounds like you not only got a great deal on the purchase three years ago but have also earned a tax-free return.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.