With spring on it’s way, many Canadians are getting ready to sell their home. While selling your home can come with many costs, one cost you won’t have to worry about is paying tax on your principal residence.
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. Given the growth we have been seeing in the value of homes across Canada, this can be a substantial amount of income in your pocket.
Before we continue, let’s discuss what classifies a house as a principal residence.
According to tax legislation, a principal residence is a house, cottage, condo, apartment in a building or duplex, trailer, mobile home, or house boat that you own and meets the following requirements.
- It is a; housing unit; leasehold interest in the housing unit; or share of capital in a housing co-operative acquired only to get the right to inhabit the unit.
- The property is owned by you or jointly with someone else.
- You, a spouse, a common-law partner or a child lived in it at some point during the year.
- You designate it as your principal residence.
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 (i.e. the minimum lot size imposed by the municipality at the time of purchase is greater than the allotted amount).
How to Claim 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:
- The address of the property.
- The year in which the property was acquired.
- The amount the property was sold for.
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, where as 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.
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.
For more information regarding the principal residence exemption, or to report on the sale of your principal residence in 2017, contact us today.