I am in the middle of a very difficult Canada Revenue Agency audit of a taxpayer’s claim for the principal residence exemption. It now appears the property in question, built by my client some 25 years ago may not qualify for the full exemption due to the fact that the taxpayer may have held other properties, which he also built, in the intervening periods which may or not have been sold at loss and if they were not sold at a loss, no capital gain was reported.
In addition of dealing with all the technicalities related to the above, the main issue is that the taxpayer unwittingly did not keep good track of his costs which is causing everyone involved in the file quite a bit of angst. This has lengthened the period of the audit from weeks into months.
Several years ago, I wrote about this issue in the context of estate planning for the sale of the cottage. I thought I would re-purpose the blog here.
Whether it is in the context of a future disposition from an estate or during one’s lifetime (to document a gain or loss) or minimizing exposure in the event of a challenge to the principal residence exemption (which is becoming more frequent than ever) all eligible costs (i.e. build up the tax cost base of the property) should be captured and proper documentation maintained (invoices, proofs of payment) for these costs.
If the property was bought outright, the purchase price should be documented along with land transfer taxes, real estate commissions, inspections, legal, survey fees and title insurance etc.
If you built the property like my client did, all costs of land acquisition including some of the items noted above, all costs of construction, landscaping, new and renewed services to the cottage complete etc. should be fully documented with invoices, proofs of payment etc.
If you inherited the property or received it as gift, try to keep evidence of value at the time of the gift or inheritance.
If the property was held before 1971 and/or an election was made in 1994 to take advantage of a capital gains exemption, check with your professionals to get the required documentation for valuation.
What about improvements or renovations since acquisition of the property: Are they eligible costs?
It is a difficult task sometimes to determine whether repairs, maintenance and renovation costs are eligible costs (i.e. additions to the tax cost base) or just an expense. Generally, the test is whether the structure has been improved or just brought back to a previous condition of repair during your period of ownership. A good example is a new roof. If the roof was in good shape when it was acquired, then simply replacing the shingles after several years of use is probably an expense. However if a higher quality of roof shingle or new kind of roof has been installed, then it might an eligible cost.
Other examples of improvements (instead of simple repair) might be the installation of new doors and windows (with a higher insulation factor or other new features), new flooring and paneling (wood vs tiling) and upgraded fixtures. No matter what, please remember to keep all of your documents to support the cost.
For the do-it-yourself types – you can’t include your own imputed cost of labor as an eligible cost but the cost of materials and 3rd party labor can certainly be included.
Thanks for reading