Capital gains on subdivided land, and HST on vacant land

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 it. –Devon

Is there GST on land sales?

First, when you sell real estate, including vacant land, Devon, there may be income tax implications, like capital gains tax, as well as GST/HST sales tax implications. Generally, the sale of a principal residence is exempt from income tax.

How does principal residence exemption work?

Now, 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), it 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.

Reporting capital gains and sale of the property

You will need to report the transaction on Schedule 3 of your income tax return, specifically on Form T2091. You report the proceeds of disposition (the amount you sold the property for); the outlays and expenses related to the disposition (like real estate commissions and legal fees paid); your adjusted cost base (a prorated allocation of your purchase price for the property); the years you owned the property; and the years you are declaring it as your principal residence. Any time 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.

Sales tax on the sale of vacant land

The transaction could also give rise to GST/HST sales tax payable to CRA. Sales tax can apply if you are considered to have flipped the property and have taxable business income on the sale. Vacant land is generally exempt from GST/HST if the land was for personal use, or it was sold to a relative for their personal use. It does not sound like sales tax 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 subdivided it into only two parts, the sale of either of those parts should be GST/HST exempt. Land subdivided into more than two parts can give rise to a taxable sale. 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. Ask a Planner: Leave your question for Jason Heath »

About Jason Heath, CFP

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.

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Comments Cancel reply

MarionEwasiuk says:

February 17, 2021 at 8:11 am

I have a 10 acre property that I have owned, lived on for 20 years and used over the course of time for raising horses and hayland. We were recently taken into the city with a boundary expansion and I no longer have horses as I am a retired senior citizen now. I wish to sell my property and want to confirm if the total 10 acres which I used for my own personal enjoyment with the horses, would be subject to Capital Gains in any way

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1. MoneySense Editors says:
  
  April 6, 2021 at 8:49 am
  
  Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
  
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Beverly says:

April 2, 2021 at 10:25 am

I have a question… if you have a house and land and you sell part of that land but remain in the house. Do you need to claim that on your taxes in Canada?

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Krehmani says:

March 24, 2022 at 9:28 pm

Hi i have a have a oshawa which is a house on a big lot and and my primary reaidence . i would like to subdivide into 2 lots and sell both lots including the new lot and my old house . It is subject to capital gain tax thank you

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1. MoneySense Editors says:
  
  April 1, 2022 at 10:27 am
  
  Thank you for the question. We invite you to email it to [email protected], where it will be considered for future MoneySense articles.
  
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Khurram Rehmani says:

March 24, 2022 at 9:31 pm

Sorry about the typo my question is that is it subject to capital gain tax if i subdivide my existing primary redience and sell both of them including my old house and the new lot thank

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Ruth Janzen says:

April 5, 2022 at 3:27 pm

We purchased land in 1995 and in 2021 subdivided it into 11 lots. Are we subject to income tax and gst on the sale of lots?

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John west says:

April 21, 2022 at 8:46 pm

We purchased property adjacent to our existing house and property. Subdividing that into three pieces, two 1/4 lots so sell and the remainder joining on to my existing. How is the tax calculated? Is it by how much the value has increased in the 4 years of development?

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sylviette brown says:

April 29, 2023 at 5:46 pm

I purchased a lot in 2004 with the intention of developing it to make it my permanent residence. My son became a permanently disabled adult and I registered the property as an “in-trust” property, intending this property to become his permanent residence as well. All of our plans have failed to materialize and we must now sell the property, being incapable of the development costs (both in low-income brackets). I paid $125,000.00 for the lot and maintained it and paid municipal taxes etc., for years, this property is now worth $800,000.00. Are there exemptions, first for trust properties and two for disabled persons? My son has four children, all minors who are also gift-over beneficiaries. As beneficiaries can they also be included in for Capital Gains

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Casey Martin says:

May 5, 2024 at 3:41 pm

Hello I have a property that is about 11.5 acres. I have built a home and lived there with my family for 2 years and it is my principle reseidence. I have about 1 acre of grass that my house is on. The rear 10.5 acres is all forest land and we have a trail throuhg it for riding atv’s and walking hte dog. A business wants to buy my back 10 acres and join into to another neighbouring parcel that is also for sale.

My question is, since this back 10 acres is part of my principle residence, if I sell this land would there be capital gains I would have to report. The offer is for $300,000 today from a development company.

Thanks

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Charles Sunney Nainggolan says:

July 9, 2024 at 12:39 pm

I sold out my house as principal residence in Surrey in 2017, in Tax year 2017 I did not pay tax for Capital Gain.
In 2019 due to covid I lost my job in Vancouver, we moved to New Brunswick, and bought a house as my Principal residence. in 2020 I moved to Whitehorse for working, then I rented out the house until 2024.
Then I sold out the house in 2024 more than I purchased it.

Do I have to pay Capital Gain in this case? Thanks

Note: I bought a house as a Principal Residence in Fort St John in 2023.

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