FP Answers: Will I pay capital gains or HST if I rebuild my principal residence then sell it?
Q. If I tear down and then rebuild my principal residence of 32 years and sell it without moving in, will I have to pay any capital gains tax or Harmonized Sales Tax (HST)? Is there anything else I should be aware of so I don’t get in the crosshairs of the Canada Revenue Agency (CRA)?
FP Answers: To best understand how this transaction may be taxed, we need to review several considerations surrounding your proposal, Vera. The principal residence exemption (PRE) and its nuances are the first place to start.
Also, the size of the property must typically be on land that is no more than a half hectare in size, or some of the sale proceeds may be taxable.
If you live in and sell the property today, as is, you may be able to walk away without having to pay any tax, assuming you have not owned another property where you claimed the PRE during the time you have owned your home, Vera. The issue for the PRE, as it relates to your proposal, is that your renovation may or may not allow you to qualify fully for the PRE. There are also potential sales tax implications.
When completing a substantial renovation, a property may qualify as a newly built property if the interior of the home has been gutted and meets the 90 per cent test, meaning that at least 90 per cent of the interior has been removed as part of the process. You don’t necessarily need to remove parts of the structure, such as the foundation, exterior walls and floors, to qualify for this test.
The key is to focus on the livable areas of the home and whether those parts add up to 90 per cent. So, for instance, crawl spaces are not livable and may be excluded from the calculation.
If your “tear down” does surpass the 90 per cent test, then you may be considered a
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