Like many businesses, real estate agencies have had to adjust their operations in light of recent events. But regardless of everything that is going on around us, buying and selling homes is still top of mind for some Canadians, whether they are looking to downsize to save money, moving cities for better job opportunities or other reasons.
Some Canadians may be considering selling their home but are holding off, hoping that there will be more buyers and chances to maximize profits later in the year.
No matter the situation, if you are planning to sell your home in 2020, you need to know about the principal residence exemption.
Unlike most income 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, so long as that home was your principal residence, which can mean 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 a 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.
According to tax legislation, a principal residence is a house, cottage, condo, apartment in a building or duplex, trailer, mobile home, or houseboat that you own and meets the following requirements.
In addition, the amount of land considered to be part of your principal residence is limited to .5 hectare (5,000 sq. m or 1.24 acres) unless you can demonstrate that you need more land to reasonably enjoy the property. Reasons for claiming additional land can include:
Claiming Your Principal Residence Exemption
While in the past, Canadians did not have to report on the sale of their homes, as of 2016, reporting is now a requirement. Taxpayers must now report the sale of their principal residence on their tax return and designate their property as their principal residence by completing Schedule 3 Capital Gains (or Losses).
In addition, as of 2017, taxpayers who have sold their principal residence must also file a 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:
You will also be required to verify the number of years of ownership during which the property was used as a principal residence (i.e. the number of years of ownership less the number of years where you did not use it as your primary residence during some point in the year).
If you file your tax return electronically, your Schedule 3 will be mailed in with the rest of your return for the 2020 tax year and your T2091 will be kept and produced only if the Canada Revenue Agency requests it. If you mail your tax return in, you will be required to complete and mail in both forms.
For more information regarding the principal residence exemption, contact us today.