The fall can be a great time to sell your home. You will be dealing with serious buyers who want to move before the season changes, and you’ll also have a less saturated market since many sellers list their homes in the spring.
Whether you decide to sell now or later, however, if you are selling your home, you will benefit from the principal residence exemption.
What is the principal residence exemption?
Unlike most incomes that we earn throughout the year, neither the income earned from the sale of your home or the capital gain will be taxed when you file your annual tax return - as long as that home was your principal residence.
This could result in a substantial amount of income in your pocket.
The reason that Canadians are not required to pay taxes on the sale of their principal residence is because the home is often the largest asset a Canadian owns in their lifetime and, for many, is a major part of their financial and retirement planning.
Principal residence eligibility
A principal residence is a house, cottage, condo, trailer, mobile home, houseboat or apartment in a building or duplex that is owned by you or jointly with someone else, and was occupied by you, a spouse, a common-law partner or a child at some point during the year.
The amount of land considered to be part of your principal residence is limited to 0.5 hectares (5,000 sq. m or 1.24 acres), unless you can demonstrate that you need more land to reasonably enjoy the property.
Some circumstances which may allow for additional property include:
- The size and character of the house, along with the location of the home on the property.
- A need for public access roads.
- Zoning laws dictate a need (i.e. minimum lot sizes or restrictions on subdividing).
In addition, any land used for income generation that’s over the half-hectare allowance will be viewed as business property and therefore subject to capital gains.
Claiming your principal residence exemption
Taxpayers must report the sale of their principal residence on their tax return and designate their property as their principal residence by completing the Schedule 3 Capital Gains (or Losses) tax form.
In addition, taxpayers who have sold their principal residence must also file Form T2091(IND) Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust).
Information gathered on this tax form includes:
- The address of the property.
- The year in which the property was acquired.
- The amount the property was sold for.
- The number of years of ownership during which the property was used as a principal residence.
If your chartered professional accountant files your tax return electronically, your Schedule 3 will be mailed in with the rest of your return, whereas your T2091 will be kept and produced only if the Canada Revenue Agency requests it.
If your accountant mails your tax return in, they will be required to complete and mail in both forms at the same time.
By engaging with a chartered professional accountant, such as Koroll & Company, you'll ensure that you fill out both of these tax forms correctly and reduce the chance that the CRA contacts you for further proof that the sold property was indeed your principal residence.
Are you looking for more information regarding the principal residence exemption, or need help reporting the sale of your principal residence? Contact us today!