Considering a COVID Relocation?

Think about the cost, the taxes, and your future lifestyle needs first

Matthew Elder 16 October, 2020 | 2:29AM
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Bridge in Vancouver

The transformation of life brought on by the COVID-19 pandemic has prompted many urban dwellers to consider moving away from the city to rural areas. Leaving the congested city and suburbs for wide-open spaces beyond significantly reduces the risk of COVID infection. And with many employees working from home, proximity to the workplace is no longer a factor.

While the economy was partially reopened during the summer, the arrival of a second wave has again reduced the appeal of urban living. As a result, realtors continue to report very active markets outside Canada’s metropolises.

Cities May Bounce Back
But what happens when a safe and effective vaccine is widely circulated, and the virus is finally defeated? While some retailers may have gone out of business, new and old ones may rise from the pandemic’s ashes and restore life to city streets. Moreover, the demand for downtown office space should partially recover. While companies may need to house fewer employees in their downtown officers – due to some staff permanently working off-site and others coming in at different times – the nature of that space may change to increase square footage per person. 

What’s more, the appeal of inner-city life may well return, as restaurants, theatres, stores and other attractions re-open. And with many people again working at least part of the time downtown again, walking or cycling to the office will become more appealing than ever, as opposed to riding crowded commuter trains, subways and buses. It’s also worth noting that some urban-planning experts believe that, even if the post-pandemic recovery of downtown proves sluggish and incomplete, it’s likely that suburbs and “satellite downtowns” will continue to grow and provide a facsimile of the inner-city workplace and lifestyle.

Meantime, will the appeal of urban living return and living in the country become a bit “old” for many former city slickers? That’s food for a sober second thought before you rush to sell your city home at a low price and buy high in the country. It’s possible you might find yourself reversing the move in three to five years’ time, selling the place in the country in a softening market and buying back into a resurgent city. In addition to navigating changing real-estate markets, you’ll have to bear the cost of legal paperwork, title registration, certificate of location, realtor commissions, home inspection, municipal welcome tax, utility connection, painting and cleaning, and, of course, moving.

Principal Residence Capital-Gains-Tax Exemption
If you're stuck with selling a home, it also means understanding the capital-gains tax rules. If a home is your principal residence, then no tax is payable on its sale. For those who own only one home, this normally is a cut-and-dried procedure: the amount of any net profit resulting from the property’s sale is not included in your taxable income. (This assumes you have not used the premises primarily for a purpose other than a home, such as a rental property or to operate a business. Maintaining a room or two for home-office use is fine.) To document the use of the exemption, you need only include Canada Revenue Agency Form T2091IND with your federal income tax return (TP-274-V for Quebec returns) that you file for the year of the sale. 

More than One Home Can Be Exempt
If you have multiple residences, such as a city home as well as a cottage or vacation condo, then things can become more complicated. Any one of these properties can be designated as your principal residence – as long as you or an immediate family member, in the words of the Income Tax Act, "ordinarily inhabit" the dwelling. 

The exemption cannot be applied to multiple properties simultaneously; however, the designation can be applied to a qualifying property, as long as only one dwelling for a particular year is identified and ultimately claimed as such. You do not actually make a designation until the time comes to report a sale of a principal residence on your tax return. This information is documented on the aforementioned tax forms.

So, in theory, you can cherry-pick the years to designate one or the other, thus tailoring your principal residence claim to your tax advantage. If you own more than one home and are contemplating selling one or both in the foreseeable future, it makes sense to determine which sale (now or in the future) would generate the largest gain and designate it as the principal residence for the entire time you’ve owned it, or for specific periods.

Note that, while the rules state that you can only designate one property for a full taxation year, for a year in which a property is bought or sold, both old and new properties can be deemed a principal residence for the entire year. Or if you sell your cottage and keep the city home, then both homes can be claimed under the exemption for the whole year.

Half-hectare Restriction
For country property, normally only the land within one-half of a hectare surrounding the house is considered by the tax authorities to be part of a principal residence, and thus sheltered from capital gains tax. However, additional adjacent land may be included to the extent the vendor can prove this land was necessary for the residence’s use and enjoyment. (“Enjoyment” does not include recreational use.) A prime factor in including extra land under the exemption is municipal lot-size regulations, such as minimum dimensions or area, or a subdivision or severance restriction. Arguments in favour of going beyond the half-hectare limit also might include access (the driveway traverses this land) or privacy (proximity to neighbouring lots). 

Careful Consideration Needed
There are many things to consider when contemplating a COVID-inspired move. It pays to consider all of the uses – lifestyle and financial – before you decide the pandemic and its possible longer-term effect merits a change in where you live, work and enjoy life.

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Matthew Elder  

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