Sale of a Property – Principal Residence Exemption
As a Canadian resident you may be eligible for an exemption on the taxation of capital gains when you sell your house. According to the Income Tax Act if the property was your principal residence for all years you owned it, or all years but 1, the entire gain from sale is exempt. However you and your family (spouse and unmarried minor children) must also be living in that residence and be claiming the property as their principal residence as well.
Prior to the 2016 tax year, there was no requirement to report the sale of your principal residence on your income tax return. However for 2016 and later years you are now required to report any sale of property to the CRA. Going forward, the sale is to be reported on Schedule 3 (Capital Gains) and it is to be filed with your T1 tax return for the year of sale. You will be asked to report date of acquisition, proceeds of disposition and a description of the property. If the home was not your principal residence for all years you owned it, you are also required to file form T2091 “Designation of a property as a principal residence by an individual”.
If you forget or fail to designate the property as your principal residence the CRA may allow a late designation but there also may be a penalty applicable.
If you use part of your principle residence to earn or produce income i.e., home office, bedroom rentals, basement rentals etc. the CRA will still consider it all your principal residence IF; the income producing is secondary to the main use of the property as a residence, there is no structural change of the property and no CCA is claimed on the property. If any of those conditions aren’t met, you may have to split the selling price and the adjusted cost base between the percent you use for principal residence and the percent it’s used for other purposes.
If you buy a home and use it as a principal residence and later decide to rent it out (the whole property) or vice versa, there will be a “deemed disposition” rule according to the income tax act. This deemed disposition would mean that once you switch your property from your principal residence to an income producing property you are deemed to have disposed of or sold the property and repurchased as income earning property at fair market value. This could possibly trigger taxable capital gains. However there is an election out of that rule resulting in no deemed disposition. If you are approved for that exemption you can also make another election to qualify the property as your principal residence for up to an additional 4 years while you rent it out (Providing that you do not claim another residence as a principle residence during that time).
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