The article “Understanding The 1994 Capital Gains Tax Election” was originally published on MoneySense on July 15, 2020.
John was not aware of the $100,000 capital gains exemption that applied until 1994 and wants to know if he can use it to reduce the tax payable on his cottage.
Also, who determines fair market value (FMV)—do you just look at comparable properties yourself and pick one? Do you get a real estate agent to assess it?
A. It sounds like you have done some research on this capital gains exemption, John, or at least received a bit of advice from someone. I will tell you right off the bat that there seems to be a slight misunderstanding about how the exemption works.
Form T664 was a tax form used to make an Election to Report a Capital Gain on Property Owned at the End of February 22, 1994. Prior to that date, there was a $100,000 capital gains exemption that applied generally to capital property like cottages, rental properties, stocks, mutual funds and similar capital assets. The federal government ended the exemption at that time, but still allowed an exemption of $500,000 for qualified small business corporation shares and qualified farm property (now $883,384 and $1,000,000, respectively, in 2020).
This election was typically filed with a taxpayer’s 1994 tax return, due April 30, 1995. A late-filed election was permitted for up to two years afterwards, with penalties payable accordingly.
It sounds like you may have misunderstood both how this election worked and how to file it, John. The election was not to exempt future capital gains from taxation, but rather accrued capital gains up to the time of the election. It is not possible to file it now, all these years later.
The result is that when you sell or transfer your cottage, or upon the later of your death or your spouse’s death, capital gains tax may be payable. You may be able to shelter some or all the increased value from taxation by claiming a principal residence exemption. This exemption can apply to any property you regularly use, including a cottage. It is not limited to your home. However, you and your spouse can only have one principal residence in a year, so if you claim a principal residence exemption on your cottage, it may expose your home to taxation at a later date.
Any renovations you do to a cottage can also reduce the eventual capital gain, John; so can the purchase costs (land transfer tax, legal fees, etc.) and selling costs (real estate commission, legal fees, etc.). One-half of a capital gain is subject to taxation, calculated based on the sale price minus the adjusted cost base minus the transaction costs. A large capital gain could push you into a high tax bracket of over 50%, resulting in tax payable on over 25% of the total gain.
The FMV, or fair market value, of a cottage often needs to be determined. This can apply if ownership of a property is transferred to a family member, to certain types of trusts, or upon a taxpayer’s death. The FMV would have needed to be calculated as of February 22, 1994, to determine the accrued capital gain on your cottage had form T664 been filed at that time.
FMV for real estate can be estimated, but is probably more reliably determined by a professional appraiser. The cost of a professional appraisal can be relatively modest, in the hundreds of dollars, or more expensive for more unique types of property.
Those who did make use of the 1994 capital gains exemption may have been able to exempt from taxation up to $100,000 of appreciation up to that time. Even taxpayers with more than $100,000 of deferred capital gains could use the exemption to increase their cost base by $100,000.
To answer your question, John, this is not a retroactive election that is available to you currently. Those who claimed the exemption in the past, or whose family members may have claimed it, can confirm it by contacting the Canada Revenue Agency (CRA).
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.