In Canada, you do not have to pay capital gains tax on any increase in the value of your principal residence for each year you have properly designated the home as such. This is second nature to most Canadians – buy a house – live in it – sell it – claim the exemption.
Starting with your 2016 tax return (generally due late April 2017), you are now required to report basic information to the Canada Revenue Agency (the “CRA”) regarding the sale of your principal residence in order to claim the exemption. Should you fail to provide the basic information, you may be subject to penalties if you are required to make a late filing. The CRA has stated that the penalty will be the lesser of: $8,000.00, or $100 for each complete month from the original due date to the date your request was made in a form satisfactory to the CRA1.
What Qualifies as a Principal Residence?
A principal residence is any residential property owned and ordinarily inhabited by you or your spouse, common-law partner, former spouse, former common-law partner or child in that given year. As of 1982, the principal residence exemption has been limited to one family unit, rather than per person – i.e. if you and your wife own a home and a cottage, you can jointly claim only one as your principal residence.
You are permitted to earn income from your principal residence by renting it out and/or using it as a home office, so long as these uses are incidental to the primary use of the property as your principal residence.
There are still ways to claim a home as your principal residence, even if it is not ordinarily inhabited by you or any of the above-mentioned persons by means of an election under subsection 45 (2) or (3) of the Income Tax Act. Specific requirements must be met in order to successfully claim the exemption under these subsections and for further information you should speak with your accountant.
Going Forward – How to Claim the Principal Residence Exemption
Going forward, for the tax year that you sell your principal residence, you must complete “Schedule 3, Capital Gains” and file it with your “T1 Income Tax and Benefit Return”.
If the property was your principal residence for every year that you owned it, you will make the principal residence designation in your Schedule 3. In this case, the year of acquisition, proceeds of disposition and the description of the property are the information that will have to be reported.
If the property was not designated as your principal residence for every year that you owned it, you will complete Form T2091 – “Designation of a Property as a Principal Residence by an Individual (Other than a Personal Trust)” or Form T1255 – “Designation of a Property as a Principal Residence by the Legal Representative of a Deceased Individual”. Once you have completed the applicable form, you can attach and file it with your return. Again, this form only needs to be completed if you did not claim the property as your principal residence every year that you owned it.
1 The CRA has stated on its website that it will focus efforts on communicating to taxpayers and the tax community the requirement to report the sale and designation of a principal residence in the income tax return. For dispositions occurring during this communication period, including those that occur in the 2016 taxation year, the penalty for late-filing a principal residence designation will only be assessed in the most excessive cases.
Information herein is NOT legal, financial or investment advice. Should you have questions with respect to the information herein, please contact Lemke Law Professional Corporation or the Canada Revenue Agency at 1-800-959-8281.