The article “Could Selling A Vacation Property Affect Government Pensions?” was originally published on MoneySense on September 1, 2020.
Colleen wants to sell her trailer but is worried about the impact on her CPP, OAS and GIS benefits.
Q. I was wondering what would happen if I sold my mobile home this year for $100,000. Currently, I receive Canada Pension Plan, Old Age Security and Guaranteed Income Supplement benefits totalling about $1,800 a month. Would the sale affect my pensions?
A. When you sell what is known as “capital property,” you may have a taxable capital gain or loss, Colleen. Capital property includes real estate assets like a rental property, cottage or trailer. It can also include stocks, bonds, mutual funds, exchange-traded funds (ETFs) or other investments held in a taxable investment account.
A capital gain occurs when your sale proceeds exceed your purchase price or adjusted cost base. The cost of selling can reduce your sale proceeds, and acquisition or other costs can increase your adjusted cost base. In the case of real estate, common adjustments to your cost base include renovations.
Your trailer may be eligible to designate as your principal residence, and this may avoid taxation, as a principal residence is exempt from capital gains tax. It is a common misconception that only the home that you live in primarily can be your principal residence; in fact, a cottage, trailer, mobile home, or even a houseboat can be a principal residence.
Canada Revenue Agency has the following four conditions for a property to qualify as your principal residence:
- 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.
Since 1982, taxpayers can designate only one home for each year of ownership as their family’s principal residence. The election is made at the time of sale and reported on your tax return. Even if this mobile home is in another country, like the United States, you can still designate it as your principal residence if you ordinarily inhabit it during the year.
So, you may be able to claim your mobile home as your principal residence, Colleen, and exclude it from taxation. However, if you own other real estate, like a home you live in, a principal residence election on your mobile home may expose your other home to at least partial taxation in the future. If your home is more valuable than your mobile home, as is likely the case, that could result in a larger tax bill down the road just to save a bit of tax today.
If you do elect to declare the capital gain on your mobile home, 50% of a capital gain is taxable on your tax return. If you own the home jointly with someone else, 50% of your share of the gain is taxable on your tax return. If you have capital losses incurred on other investments for the year, or unused capital losses carried forward from previous tax years, those losses can be used to reduce the capital gain on the mobile home.
Canada Pension Plan (CPP) is not impacted by your income. CPP is based on your historic contributions only and is not what’s called “means-tested” or “income-tested.”
Old Age Security (OAS) is means-tested, Colleen, and can be subject to a 15% recovery tax if your 2020 net income on line 23600 of your tax return exceeds $79,054. A recipient entitled to the maximum OAS would have 100% of their pension recovered at $128,137 of income.
If you sell the mobile home for $100,000, it does not sound like you will have to worry about an impact on your OAS pension for 2020, given that you have a low income and receive GIS. The Guaranteed Income Supplement is, however, very sensitive to even small increases in your income for the year, and this is the government benefit that is likely at risk due to the mobile home sale, Colleen.
If you are single and your income exceeds $18,600 for 2019, you will not receive GIS next year. This limit is likely to be adjusted by about 2% for 2020, as are the other limits quoted below.
If you have a spouse or common-law partner, and you both receive the maximum OAS pension, you will not be entitled to GIS if your combined incomes exceed $24,576. If your spouse or common-law partner does not receive an OAS pension, that threshold increases to $44,592.
In summary, Colleen, your mobile home sale may be subject to tax if your proceeds exceed your adjusted cost base. You may be able to shelter the gain from tax by using the principal residence exemption but, as I mentioned above, that election may be short-sighted. If the sale is taxable, only your Guaranteed Income Supplement is likely to be impacted for 2021 based on your 2020 net income, leaving your CPP and OAS pensions intact. There may be other federal or provincial benefits that are reduced for the year due to a spike in your income.
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.