Are you considering selling your house to a family member or someone close to you? The sale of real estate between family members in Quebec has specific tax implications. Our tax experts in Montreal explain the rules surrounding the sale of a residence to a related person.
Who can be considered a related person?
A “related person” is generally a member of your family or someone with whom you have a control or association relationship. This includes:
- Spouses and common-law partners,
- Parents, children, grandchildren, brothers, and sisters,
- Corporations in which you or your relatives hold a significant interest.
Selling a house between family members and taxation
First, when you sell a property to a related person, the transaction must be made at fair market value (FMV), even if the agreed sale price is different. FMV is the price the property would obtain in a free market between a willing buyer and a willing seller.
If you sell the property for less than FMV, the Canada Revenue Agency (CRA) and Revenu Québec consider the sale to have occurred at FMV. You will need to report the FMV as the proceeds of disposition. To better understand the rules for this type of sale, here are a few key points to consider:
Capital gains calculation
Capital gains are the difference between the proceeds of disposition (the FMV) and the adjusted cost base (ACB) of the property. If you sell to a related person for less than FMV, the capital gain is calculated using the FMV as the proceeds of disposition.
Principal residence exemption
If the property sold is your principal residence, you may qualify for the principal residence exemption, which can reduce or eliminate the taxable capital gain. To qualify for this exemption, you must have designated the property as your principal residence for all the years you owned it.
ACB adjustment for the buyer
If you sell the property to a related person for less than FMV, the ACB of the property for the buyer will be adjusted to FMV. This means the buyer cannot use the lower sale price to reduce future capital gains.
Land transfer tax
The buyer of real estate in Quebec must pay land transfer tax, often referred to as the welcome tax. The land transfer tax is based on the higher of the sale price or FMV.
Alternative strategy: gifting
You may also consider gifting the property instead of selling it, as this may have different tax consequences. Gifts of real estate to a related person are also valued at FMV, and you may still be subject to capital gains.
Documentation and declarations required
To support the sale of a property to a family member, you will need to keep several documents, including:
- Copy of the sale contract: indicating the sale price and the terms of the transaction,
- FMV appraisal: obtain a professional appraisal to determine the FMV of the property and justify the amount used in the tax return.
Additionally, when you file your tax return the year following the sale, you will need to include the following documents:
Federal forms
- Complete form T2091(IND): Designation of a Property as a Principal Residence by an Individual (other than a personal trust), to report the principal residence exemption.
- Include capital gains in your T1 income tax return.
Provincial forms
- Report capital gains in your Quebec tax return using Schedule G.
- Use form TP-274-V: Designation of a Property as a Principal Residence, to designate the principal residence.
Get personalized advice to plan your sale
Selling a house between family members in Quebec requires a good understanding of the tax rules to avoid unexpected consequences. First, remember to keep all documentation related to the transaction! Additionally, make sure to understand the concept of fair market value, the implications of capital gains, and the principal residence exemption.
Are you planning to sell real estate to a family member soon? Consult one of our tax accountants to discuss your situation and optimize your tax planning.
