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?
Correct Answer
A) $100,000
The principal residence has a $400,000 capital gain but is exempt from tax due to the principal residence exemption. The cottage has a $200,000 capital gain, of which 50% ($100,000) is taxable. Only one property per family can claim the principal residence exemption per year.
Why This Is the Correct Answer
Option A is correct because the principal residence ($800,000 - $400,000 = $400,000 gain) is completely exempt from capital gains tax under the principal residence exemption. The cottage has a $200,000 capital gain ($500,000 - $300,000), but only 50% of capital gains are taxable in Canada. Therefore, the taxable capital gain is $200,000 × 50% = $100,000.
Why the Other Options Are Wrong
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A taxpayer bought a city home and a cottage for $400,000 each in the same year and has owned both ever since. Both qualify as a principal residence for every year. The city home is now worth $800,000 and the cottage $600,000, and both are sold this year. Which designation minimizes tax?
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