If you have sold your home and it is your principal residence then you should be able to use the principal residence exemption to reduce or eliminate any capital gain for income tax purposes on the sale of the property.
CRA states that a principal residence can be a house, cottage, condominium, apartment, trailer, mobile home or houseboat.
Principal Residence Exemption Qualifications
In order for the principal residence exemption to qualify the following must all be applicable:
- Must be owned or jointly owned,
- Must be ordinarily inhabited during the year
- Land portion must not exceed 1.2 acres
- The property must be designated as your principal residence.
Designation of property
From 1982 onward, the CRA has allowed one property per family (spouses and children under 18) to be deemed as the primary residence. You are not required to designate your property as a principal residence annually, you only have to designate it when it is sold or is deemed to have been sold.
Principal Residence Exemption Formula
The formula used to determine the amount eligible for the principal residence exemption is = A*(B/C)
A = Capital gain on the property upon sale
B = Number of years the property was designated as a primary residence plus one year *
C = Number of years the taxpayer owned the property
*Please note that B cannot exceed C
If you have multiple primary properties, you can elect one property per year, per family unit. When disposing of a property, you can determine the best property to elect as your primary residence to maximize your principal residence exemption. For example, you should allocate more years to the property that has the higher capital gain to reduce the tax owing.
Changing your principal residence to a rental or business property
If you have decided to rent your property or convert it into a business property, you can make an election that states you have not yet started to use it as a rental/business property. If this election is made, you will not report any capital gain if the use is changed from principal residence to rental/business in the future.
While the election is in effect, you can designate the property as your principal residence for up to four years.
Changing part of your principal residence to a rental or business property
If you have decided to convert a portion of your principal residence into a rental or business property, the CRA uses 3 conditions to determine if the change in your residence qualifies as an actual change of use.
- The rental/business use of the property is relatively small in relation to its use as a principal residence
- There are no structural changes to the property to make it more suitable for rental/business purposes.
- CCA was not deducted on the portion used for business/rental purposes.
If all 3 of the above criteria are met, you are not considered to have changed its use from your principal residence and the property is not considered disposed of at its fair market value.
Please note that this may change the proportion of the principal residence exemption available to your primary residence.
Loss on sale of primary residence
A loss on the disposal of your primary residence is considered a personal use property loss and therefore the loss cannot be used and is deemed to be nil.
For further information on primary residence exemptions, the CRA has created the following folios on this topic
- S1-F3-C2 – Principal Residence
- Form T2091
- T4037 – Capital Gains
Reporting requirements on the sale of your principal residence changed in 2016 and you now have to report the sale of your home in your tax return in the year it sold. For more info on reporting requirements click here.
If you would like more information or have any questions, feel free to contact us at 780.466.6204, or click here to send us an email.
Thanks to Darren Buma of KWB Chartered Accountants for providing this content.