Principal Residences

Generally, on the sale of capital property, capital gains rules apply, and you will be taxed on half of total gain. Luckily, there is some tax relief when it comes to your principal residence. Your principal residence is the place where you and your family ordinarily inhabited during the year. It can be any of the following types of housing units:

  • a house;
  • a cottage;
  • a condominium;
  • an apartment in an apartment building;
  • an apartment in a duplex; or
  • a trailer, mobile home, or houseboat.

A principal residence is generally exempt from capital gains tax when disposed of assuming that it meets the qualifications of such property.

How does a property qualify?

  • You jointly or solely own the property
  • You, your current or former spouse or common-law partner, or any of your children lived in the residence for some time during the year
  • You have designated the property as your principal residence
  • It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation.

In any given year, you can only designate one property as your principal residence. If you own more than one property, capital gains will be applicable to one of these. In order to determine which property is most beneficial to designate it depends on your current goals. Consider the following example of a family who just sold their cottage in 2017. 

 

House

Cottage

Purchase date

2005

2005

Purchase price

$400,000

$100,000

Fair market value when cottage sold

$556,000

$152,000

Capital gain

$156,000

$52,000

Years owned

13

13

Gain per year

$12,000

$4,000

If the family wanted to reduce their current taxes payable they would designate the cottage as their principal residence for the 2005 to 2017 period which would result in the full $52,000 capital gain being tax free. This would result in the gain on the house continuing to accrue until such time that it is sold.

If the family wanted to reduce their overall taxes that they will owe during their lifetime they would choose to designate the house as the principal residence therefore avoiding the $156,000 capital gain. This will result in the $52,000 capital gain on the cottage being taxed in the current year.

Changes in Use

Anytime there is a change in use of a property there is a deemed disposition, which means it is considered to have been sold and re-acquired at its fair market value. Examples of change in use are when you change all or part of your principal residence to rental or business activities, or vice versa if you change your rental or business operation into a principal residence. In the case of changing from a principal residence to a rental property you have a choice, to continue to designate the property as your principal residence under subsection 45(2) or cease principal residence designation. If you elect to continue designating the property as your principal residence there are a few conditions that must be upheld:

  • no depreciation can be claimed on the property
  • the election can only be made for up to 4 years
  • you must report your net rental or business income 

It should be noted that a deemed disposition can also occur on the change in use of part of a property. For example if you begin renting your basement but continue living in the upstairs portion of the home there will be a deemed disposition. At that time you can elect to use the 45(2) election for a period of 4 years; or going forward only designate the upstairs portion of your home as your principal residence.

Reporting

On October 3, 2016, the government announced that when you sell your principal residence you now must report this disposition on your income tax return. Previously there was no requirement to disclose the transaction. The basic information required is as follows:

  • date of acquisition
  • proceeds on sale (fair market value in the case of change in use)
  • description of the property

Reporting this will not effect your taxes payable and is only for information and compliance purposes. However if the disposition is not reported there will be a penalty of the lesser of:

  • $8,000
  • $100 for each complete month from the original due date to the date your request was made in a form satisfactory to the CRA

 - Written By Devon Sweet 

Reference:https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/...