The Principal Residence Exemption may allow for the profit from the sale of your home to be received tax-free.
For many Canadian households, a vast amount, if not most of their wealth is tied to their homes. Accordingly, it is imperative that taxpayers understand the wide array of taxes affiliated with buying and selling real estate in Canada. One of these taxes would be the capital gains tax. Upon the sale of a property, a taxpayer must report and pay any capitals gains tax incurred from the sale. Capital gains tax from the sale of the property would be one-half of the difference between the proceeds of disposition and the adjusted cost base. In other words, you subtract the amount you sold the house for with the original purchase price and divide this number by two. This amount must be added to a taxpayer’s income for the year.
The Principal Residence Exemption
Given the substantial increases in property value in recent years, capital gains tax on the sale of a property can unexpectedly erode a huge amount of the profits earned. However, under certain circumstances, there is an exemption of paying capitals gains tax on the sale of a property. Most notably, if a taxpayer designates the property as their “principle residence”, they do not have to pay tax on the gain.
Typically, a principle residence is considered a property that is a housing unit, a leasehold unit, a leasehold interest in a housing unit or a share of the capital stock of a co-operative housing corporation acquired for the sole purpose of acquiring the right to inhabit that property.
Important Considerations for the Principal Residence Exemption
There are a few key factors to consider for the principle residence exemption. First, in the event a taxpayer has more than one property, the taxpayer can only designate one property as a principle residence per year. However, a property does not have to be designated a principle residence for the whole time between the year it was purchased and sold. The principle residence exception defined in s.40 of the Income Tax Act allows a taxpayer to select their principle residence by year and pay the apportioned capital gains tax depending on how many numbers of years the property was a principle residence.
How do I designate a Property as my Principal Residence – T2091 Form
On October 3, 2016, the CRA announced that taxpayers are required to report the disposition of a property for which the exemption is claimed. Previously, the CRA did not require you to report the capital gain from the sale of a principle residence. The change was primarily made because it became difficult for the CRA to monitor taxpayers abusing the principle residence exemption and not paying taxes.
In light of this change, taxpayers must use the T2091 (Designation of a Property as a Principle Residence by an Individual (Other then a Trust)) form to designate a property as a principle residence. Failure to file this form adequately and punctually may lead to penalties and interest. The completed T2091 form must be included with a taxpayer’s income tax and benefit return for any of the following situations:
- You sold, or were considered to have sold, your principle residence, or any part of it
- You granted someone an option to buy your principle residence, or any part of it.
The sale of a property entails many complex layers and is often the most frantic times for Canadian taxpayers. Indeed, lost in the whirlwind of selling and looking for new homes is the tax obligations that come along with the sale of a property. Make sure you are optimizing your assets and minimizing your tax burden and call us today!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.