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It is also worth noting that Canada did not have a capital gains tax until 1972, so properties owned prior to that year would need to be valued as of Jan. 1, 1972. There was also a capital gains exemption of $100,000 that was eliminated in 1994, but taxpayers could elect to realize a notional capital gain and bump up the adjusted cost base of certain assets, like real estate, at that time. These situations may or may not apply to your in-laws.
When to claim principal residence exemption in Canada
You claim the principal residence exemption on your tax return for the year in which you sold a property. So, it is not something you need to decide ahead of time. In your father-in-law’s case, Cal, if he and your mother-in-law intend to keep both properties forever, we should consider the tax implications upon death.
When you die, if you leave capital property like real estate to a surviving spouse, the default position is that the property passes to the surviving spouse at its original cost, plus any adjustments. So, no capital gain is triggered.
You can elect to have a capital gain or a partial one if it makes sense to do so. Say, for example, the deceased had a low income in the year of death, or other tax deductions or credits that their executor wanted to claim against the income and tax payable.
Capital gains tax would generally only become payable when the second spouse passes or if a property is left to someone other than the surviving spouse.
The claims to make to lower a capital gain
You mention keeping receipts, and given that the values of the two properties are similar, your in-laws may want to have a record of expenses for both. One document to keep might be the lawyer’s statement of account for the purchases, which shows legal fees, land transfer tax and other closing costs. If your in-laws don’t have these statements, the lawyer(s) may be able to provide copies.
Also, receipts related to renovations and capital improvements to the properties are relevant. These costs, as well as the eventual selling costs like the realtor’s commission or legal fees, may reduce the capital gain.
What is beneficial ownership?
The fact that your father-in-law has added his children’s names jointly on the cabin has several implications. For one, by default, this approach generally results in the presumption of resulting trust, where only the legal ownership of the property has become joint. Beneficial ownership remains with your father-in-law and mother-in-law. Beneficial ownership means who technically owns the property. If everyone still acts like it belongs to them, they still pay the ongoing costs, and nothing has really changed since they added their children’s names, no change in beneficial ownership has occurred.
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