The Beneficiary: “David” is a 47-year-old entrepreneur with a background in investment banking. He grew up in a middle-class income household, worked hard and slowly climbed his way up the real estate ladder. He’s been married for 20 years and has two teenaged kids whom he wants to similarly make their own way in the world. Despite the property he owns, David also wants a fairer real estate market.
The Inheritance: After the death of a parent three years ago, David and his wife inherited the first of many properties: A $2.3-million home in the Greater Toronto Area. Last summer, when his (divorced) father died, David also inherited his $1.5-million home. All this atop David’s own immediate family home, a perfectly-sufficient-sized house worth about $3-million, which he also owns. “I have all the houses I need and don’t need any more houses,” he says. Too bad, David: Coming up next, he’s also in line to receive a million-dollar-ish condo downtown.
What this retired teacher did with $500,000 and cabins inherited from her mother
What he did with it: Though originally concerned about an epic looming tax bill from his first (and most expensive) inherited property, David instead found himself on the other end of the tax spectrum. “Because it was my mom’s primary residence and because we decided to sell the house pretty immediately, I discovered we were completely exempt from taxes,” David said. “Minus real estate fees, the rest was just deposited into our bank accounts tax-free.”
For that, David can thank the “principal residence exemption” – probably the largest tax break regular citizens will ever get in this lifetime, although David could receive it any number of times. Provided the homeowner(s) meet the requirements, a designated principal residence can shelter most – or all – profits from a sale from capital gains tax.
A very basic summary of Canada Revenue Agency’s requirements: A “principal residence” is a housing unit (a house, apartment, condo, cottage, houseboat, trailer, etc.) that’s owned (or co-owned) and “ordinarily inhabited” most of the time (though there’s no specified minimum number of days). If “ordinarily inhabited” every year by the owner, the exemption’s easy and straightforward – provided the sale is reported on Schedule 3 of the T1 Tax Return, which itself became a requirement in 2016. Failure to report can disallow one’s claim and result in penalties.
David followed all the laws and rules, of course, and after all is said and done, he expects he’ll ultimately receive about $6-million tax-free. Like the money he’s already received, he’ll invest it quietly in “high-quality, publicly-traded companies” and tell almost no one. “We live a very low-key lifestyle and people don’t know we have what we have. We’re going to keep it that way.”
What this retired teacher did after inheriting 40 boxes of Majolica pottery from her aunt
What he learned: David has conflicted feelings about his supposed good fortune. “We’re now the beneficiaries of three tax-free pieces of residential real estate,” he explains. Unfortunately it doesn’t feel as good as it sounds.
“It kinda upsets me, to be honest,” admits David. “Yes, I’ve benefited significantly from this system. Yes, my kids will probably benefit too. But what about everybody else? Do people like me deserve these tax incentives when other people don’t have homes at all?”
Like many Canadians, David sees an increasingly unfair real estate market where homeowners are getting infinitely richer while everyone else is squeezed out.
“I don’t think it’s reasonable that there’s an infinite tax holiday for people who are already so far ahead,” says David, who despite his personal financial situation still believes the exemption should be capped and taxed accordingly – not unlike the small business exemption cap, which currently sits at $1.25-million.
“I realize this is an unpopular opinion, but I think it has to happen. Otherwise the system is just too easy to game and keep gaming.”
It’s a continuing discussion with his less-convinced wife, but David is increasingly uncomfortable with his inheritance and progressively interested in giving (most of) his money away to play his small part in a more equal world.
“There’s an affordability crisis for immigrants and young people who can’t get a break and become successful and buy a home. The Canadian dream has to stay alive for people, and I worry that we’re losing it.”
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