A couple owns two properties: their principal residence worth $800,000 and a cottage worth $300,000. If they sell the cottage for $450,000, what strategies could minimize their tax liability?
Correct Answer
B) Designate the cottage as principal residence for some years
Each family unit can only designate one property as their principal residence per year, but they can strategically designate which property receives the exemption for different years of ownership. By allocating some years to the cottage, they can reduce the taxable portion of the capital gain on its sale.
Why This Is the Correct Answer
Option B is correct because under the Income Tax Act, taxpayers can strategically designate which property serves as their principal residence for different years of ownership. While only one property per family unit can be designated per year, the couple can allocate some years to the cottage and some to their main residence. This strategic designation reduces the taxable capital gain using the PRE formula: exempt portion = (years designated + 1) ÷ years owned × capital gain. This legitimate tax planning strategy can significantly reduce their tax liability on the cottage sale.
Why the Other Options Are Wrong
Deep Analysis of This Real Estate Taxation Question
Background Knowledge for Real Estate Taxation
Memory Technique
Exam Tip for Real Estate Taxation
Real World Application in Real Estate Taxation
Common Mistakes to Avoid on Real Estate Taxation Questions
Key Terms
More Real Estate Taxation Questions
In Alberta, property taxes are primarily used to fund which level of government services?
Does Alberta charge a provincial land transfer tax when purchasing real estate?
In Ontario, who is responsible for paying the land transfer tax when a property is purchased?
A Toronto resident owns two properties: their principal residence worth $800,000 (purchased for $400,000) and a cottage worth $500,000 (purchased for $300,000). If they sell both properties in the same year, what is their total taxable capital gain?
What is the primary purpose of municipal property taxes in Canada?
- → In Ontario, what is the standard Land Transfer Tax rate for a residential property purchase of $400,000?
- → Which of the following best describes when land transfer tax is typically paid?
- → A first-time buyer purchases a $450,000 home in Ottawa, outside the City of Toronto. Which land transfer tax relief can they claim?
- → Which type of real estate transaction is generally exempt from GST/HST in Canada?
- → A first-time home buyer signs an agreement in May 2026 to buy a newly built home in Ontario from a builder for $450,000 before tax, to live in as a primary residence. If all conditions are met, what is the most HST that can be rebated under the federal and Ontario rebates combined?
- → A buyer purchasing a $2 million commercial property in Alberta asks what provincial land transfer tax will be due on closing. What is the correct response?
- → Under the Income Tax Act, what is the principal residence exemption?
- → Sarah bought an investment property 3 years ago for $400,000 and sells it today for $550,000. What amount will be subject to capital gains tax?
- → Under Ontario's Assessment Act, how often does the default schedule call for property to be revalued for assessment purposes?
- → A developer purchases a property for $2,000,000 in Alberta, subdivides it, and sells individual lots. The total sales revenue is $3,500,000, with development costs of $800,000. How will this transaction likely be taxed?
People Also Study
Real Property Law
60 questions
Contracts & Agreements
60 questions
Agency & Professional Ethics
60 questions
Mortgage & Real Estate Finance
60 questions
Related Study Resources
Helpful Resources
Previous Question
A couple in Ontario sells their city home and their cottage in the same year. Both were ordinarily inhabited by the family every year they were owned, but a family unit can designate only one property as its principal residence for each year. Which approach generally minimizes their total taxable capital gain?
Next Question
A couple purchased their home in Vancouver for $800,000 in 2018 and sold it for $1,200,000 in 2024. They lived in it as their principal residence for the entire period. How much capital gains tax will they pay?