Selling part of a home to family—any tax issues to know about?
When a home is a primary residence, its sale does not trigger a taxable event under the Canada’s Revenue Agency’s (CRA) principal residence exemption. For the home to qualify for the full exemption, you must have lived there for all the tax years that you’ve been the owner, and you must not have used it as an investment property.
So, it sounds like you won’t need to pay any capital gains taxes in this situation, Ellen.
Tax credit when buying part of a home from a relative
Here’s more good news: the family member who purchased half the property from you might be eligible to receive a tax credit, if they’re considered a first-time buyer under CRA rules. The First Time Home Buyers’ Tax Credit is a $5,000 non-refundable tax credit buyers can claim on their annual tax return when they purchase a qualifying home, which could save them up to $750 in taxes.
The latest federal budget proposes to increase the amount used to calculate the HBTC to $10,000, which would provide a tax credit of up to $1,500 to eligible home buyers. If approved, the change would be retroactive to sales on or after Jan. 1, 2022.) An accountant would be able to provide more comprehensive advice on this, Ellen.
What does a co-ownership agreement mean in Canada?
Putting taxes aside, there are other issues to take note of now that you and your relative share ownership of the home. Establishing a legal co-ownership agreement, if you haven’t done so already, will be in everyone’s best interest. This will allow you to have discussions and provide clarity while the two of you own the property together.
A co-ownership agreement covers the following:
- Ownership structure and decision-making process
- Use of the property
- Financial and insurance arrangements
- Home operation and upkeep
- Co-owner negligence or misconduct
- Dispute resolution
- Exit/entry provisions
Although some of these topics may never pose a problem for you, it’s better to have the expectations established from the get-go to protect all parties, minimize conflict and promote fairness. When getting a co-ownership agreement prepared, it’s best that you and your relative have separate lawyers representing each of you independently.