3 Mr. Bob McPipe owns a home in Edmonton as well as a cottage at Pigeon Lake. He purchased the 4 house originally for $250,000, and the cottage was purchased for $120,000. Bob lived in the Edmonton 5 house during the year, but spent six weeks each summer at the cottage. 6 7 During the current year, both properties sold: the house for $400,000 and the cottage for $250,000. 8 Bob informs you that he owned the house for 16 years and the cottage for 13 years. 9 10 Required: What is the minimum capital gain Bob must report on the sale of the two properties 11 in the current year? 12 13 Solution: 14 15 Bob has sold two properties that qualify as his principal residence during the current year. He can only claim 16 one has his principal residence for each year he owned it. To minimize taxes, he should choose to designate 17 the property with the largest capital gain per year owned as his principal residence. 18 19 Capital Gain per Year of Ownership 20 House Cabin 21 Bob McPipe should claim the cabin at the lake as his principal residence for all years owned since this 22 property has a larger capital gain per year, as compared to the house in Edmonton. This means that 23 Bob should claim the cabin as his principal residence for 12 years (one year less than the number of years 24 he owned it). By doing this, Bob will completely eliminate the gain on the sale of the cabin as follows: Exempt Gain= (1+12)/13 x $130,000 = 25 26 The full amount of the gain is exempt from tax. 27 Now, Bob can only claim is home in Edmonton as his principal residence for years in which he did not claim 28 the cabin as his principal residence because you can only claim one property per family unit as your 29 principal residence each year. The remaining years in which the Edmonton home can be designated as the 30 principal residence are: 16 years-12 years claimed for cabin 4 years. The calculation of the exempt 31 portion of the gain on the Edmonton home is: 32 Exempt Gain= 33 Calculation of Capital Gain: 34 Proceeds of disposition 35 Adjusted cost base 36 Capital Gain (loss) 37 Principal Residence Exempt. 38 Capital Gain 9 Inclusion rate O Taxable capital gain 1 (1+4)/16 x $150,000 = House