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Principal residence exemption: your questions answered

Dec 16, 2022 by System
The principal residence exemption represents an important tax break for Canadians who own their home. In this article, we will look at the ins and outs of this exemption.
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What is it?

The principal residence exemption allows you to receive the profits you make from the sale of your personal home free of tax. Normally, when you sell a capital asset (e.g. stocks from a taxable account), you have to include half of the profits you make in your taxable income. With the principal residence exemption, you can exclude these profits from your taxable income.

What conditions have to be met to claim this exemption?

Generally speaking, there are 4 conditions:

1 - The sale is a disposition of what the CRA calls a “housing unit.”

A housing unit can include

  • a house
  • an apartment or unit in a duplex, apartment building or condominium
  • a cottage
  • a mobile home
  • a trailer
  • a houseboat
  • a leasehold interest in a housing unit

2 – You were the owner of the property.

3 – You, or someone related to you, ordinarily inhabited the home.

Ordinarily inhabited is a CRA requirement that you lived in the home for at least a short period of time (24 hours).

You do not have to live in the home for it to be considered your principal residence if someone related to you (spouse or child) lives in it. For example, if you own a second residence where your child lives, this other home can be eligible for the exemption.

The two points above lead to an important nuance of the principal residence exemption: you can simultaneously own more than one property that is eligible for this exemption. More on this in the next condition.

4 - You must designate the property as a principal residence.

The principal residence exemption is not an automatic rule; to get the full exemption, you have to designate your home as a principal residence for all the years you lived in it by filing the appropriate form(s). Federally, the relevant form is the T2091; residents of Quebec also have to file the TP-274 form.

We mentioned earlier that you can own more than one property that may be eligible for this exemption at a given time. Does this mean that you can claim the exemption for more than one property simultaneously? The answer is no. You can only designate one property per year as your principal residence. There is, however, a special “one plus” rule that allows you to treat two properties as eligible for the principal residence exemption in a situation where one residence is sold and another one is purchased in the same year.

Is the land on which the house stands eligible as well?

Yes, land upon which the house is erected can be claimed for the exemption as well, up to one-half hectare.

If a portion of the home is rented out, can I still claim the exemption?

Yes, but only for the portion of the home that serves as your principal residence, and not the rented portion. In this case, you must split the sale transaction in two: one transaction for the rental portion (taxable capital gain), and another transaction for the principal residence portion. This is done by prorating the disposition and cost amounts by the percentages representing the rental and principal residence portions respectively.

Do I have to report the sale on my tax return?

Yes. Not only do you have to file the form(s) mentioned above to designate the principal residence, you also have to report the sale on Schedule 3. The designation form(s) and Schedule 3 have to be submitted along with your tax return by the tax filing deadline. If you submit late, a penalty may be imposed by the CRA (and Revenu Quebec if applicable).

How do I claim the principal residence exemption in UFile?

Find out by viewing the following video: https://www.youtube.com/watch?v=PFfD45fnqgg&t=30s

Want to learn more? Connect with us on Facebook and Twitter for news and updates on tax return and UFile online tax software. Visit Let's Talk Tax to get accurate answers to all your questions about your tax return.

Gery VittoratosPresented by UFile's tax expert
Gerry Vittoratos
MTax

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