The Tax Blog for Smart Canadians

Tips and tricks for Canadian tax filers at every stage of life from UFile's tax expert Gerry Vittoratos

Planning on selling your home this year? Don’t let the taxman spoil your move

by UFile Team Équipe ImpôtExpert | Jan 08, 2020   Comments:

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So, you’ve decided to sell your most valuable asset this year. Maybe you saw an opportunity for a place you’ve had your eye on for some time and you pounced! Whatever the reason is, there will be tax consequences for such a move. Read on…

Selling your personal home

When you sell your personal home, you are eligible for the principal residence exemption. Without going too deep into legalese, this essentially means that you are exempt from paying any tax on the sale of your personal home, so you get to pocket any profits you make from that sale.

To claim the exemption, you have to designate your property as your “principal residence” on your tax return by completing the bottom portion of Schedule 3 (Capital Gains) and the T2091 form. The designation is due at the same time as your tax return; if you file late, the CRA might refuse your designation, and if they accept it, penalties will apply… and they’re stiff! If your late election is accepted, the penalty will be the lesser of $8,000 or $100 per month that you are late. Ouch!

You “designate” your home by declaring it as your principal residence for each year that you lived it in. You can only designate one home per year. You think that’s odd? Can you actually have more than one home considered as your principal residence? The answer is yes! Keep reading to find out the details.

More than one principal residence

As mentioned above, you can actually have more than one home considered as a principal residence at the same time. How, you might ask? This is due to the “ordinarily inhabited” rule. In order to claim the principal residence exemption, you have to show the CRA that you live in the house that you’re selling. The CRA does not specify how long you have to live in the house to meet this rule, only that you have to live in it at some point in the year. This means, for instance, that if you own a cottage as a secondary home and sell it, you can claim the principal residence exemption for your cottage as long as you lived in it for a portion of the year. Be careful though, and remember that you can only claim one house at a time for each year that you are designating one of your homes as a principal residence; this means that if you choose your secondary home as your principal residence for certain years, you can no longer use the exemption for those years when you sell your regular home.

Let’s look at an example to understand this concept:

Jane owns two homes: her regular home in the city and a lakeside cottage where she likes to stay in the summertime. She has owned the cottage since 2015 and her home in the city since 2010. The area where the cottage is located picks up in value and she gets an offer that she can’t refuse. Jane sells the cottage for a tidy profit. Is it taxable? Since Jane resided in the cottage during the summer, she can use the principal residence exemption because the “ordinarily inhabited” rule applies (see above). On the designation form (T2091), she will indicate 2015 to 2020 as the years that her cottage was her principal residence, and she will have no tax to pay on the capital gain.

This is great news for Jane! But remember, there’s a catch: she can no longer use the principal residence exemption for her regular home in the city for the years 2015 to 2020 because she used the exemption on the cottage for those years, and only one house can be designated for a given year. As a result, when Jane sells her home in the city, a portion of the gain will be taxable.

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