Final answer:
To minimize capital gains, Mr. Simms should designate the property with the highest annualized gain as the principal residence for as many years as possible, which is the English Bay home. Calculations show that the English Bay home has an annualized gain of $16,250 compared to the Whistler Cottage's $14,736.84. A tax professional should be consulted for the exact calculations and application of current tax laws.
Step-by-step explanation:
The student is asking about how to optimize the use of the principal residence exemption to minimize capital gains taxation from the sale of two properties in Canada. To do this, Mr. Simms should designate the residence that has the highest capital gains per year as his principal residence for as many years as possible. We will need to calculate the annualized gain for each property to determine which property should be designated as the principal residence for the maximum years allowed.
Calculation for the English Bay Home
Selling price: $515,000
Original purchase price: $125,000
Capital gain: $515,000 - $125,000 = $390,000
Number of years owned: 2021 - 1997 = 24 years
Annualized gain: $390,000 / 24 = $16,250
Calculation for the Whistler Cottage
Selling price: $320,000
Original purchase price: $40,000
Capital gain: $320,000 - $40,000 = $280,000
Number of years owned: 2021 - 2002 = 19 years
Annualized gain: $280,000 / 19 = $14,736.84
Optimal Designation
The English Bay home has a higher annualized gain, so it should be designated as the principal residence for as many years as possible within the period it was owned. The principal residence exemption can then be applied to reduce the taxable gain on this property, effectively reducing the overall tax liability.
Without the precise rules for the principal residence exemption, including factors such as the +1 rule, and any potential changes to tax law since the knowledge cut-off date, we cannot definitively calculate the exact taxable gains. Mr. Simms should consult a tax professional to apply the current laws correctly and make the most informed decision.