In Canada, there are a number of laws surrounding the taxation of capital gains of an individual’s
principal residence. When you sell your home, you may be required to pay taxes on any realized capital
gains. Generally, individuals are exempt from paying taxes on capital gains if said property was solely
your principal residence during every year you owned it. However, if the property is not your principal
residence for any of the time it was in your possession, you will not be entitled to the exemption for
principal residences on all or part of the capital gains you are required to report.
A property is designated as a principal residence when you sell or are considered to have sold all or part
of the property. When selling, Form T2091(IND), Designation of a Property as a Principal Residence by
an Individual (Other than a Personal Trust) must be used to designate your property as your principal
residence. Only page 1 of T2091 must be filled out if the property was your principal residence for all the
years you owned it or for all years except the year in which disposition.
What is a Principal Residence?
Your principal residence can be any of the following types of properties: a house; a condominium; a
cottage; an apartment in an apartment building; an apartment in a duplex; a trailer, mobile home, or
houseboat.
These types of properties do not automatically qualify to be a principal residence. To be a principal
residence, a property must meet all of the following four conditions:
1. It is a housing unit, leasehold interest in a housing unit, or a share of capital stock you own in a
co-operative housing corporation only for the purpose of acquiring the right to inhabit a housing
unit owned by that corporation
2. You own the property alone or jointly with another individual
3. You and your family—current or former spouse, or common-law partner, or any of your
children—must have lived in the property at some point during the year.
4. The property must be designated as your principal residence
Usually, the land your property is located on can be part of your principal, but the amount of land is
limited to 1.24 acres or 0.5 hectare.
Selling Your Principal Residence
The sale of your principal residence must be reported to the CRA. Since 2016, the CRA only allows the
principal residence exemption to apply if you report the sale and designation of your principal residence
on your income tax return. If an individual forgets to designate their property as their principal
residence the year they sell the property, it is possible to ask the CRA to amend your income tax return,
but late penalties may apply.
For situations in which your property was not your principal residence for every year you owned it, you
must report the capital gains for the years in which the property was not designated as your principal
residence.
It is important to note that the principal residence exemption may change depending on how an
individual utilizes their principal residence. If a part of the property is used to generate income, only part
of the home will qualify for the principal residence exemption when the home is sold. If this occurs, you
will be required to split the selling price with the adjusted cost base between the part of the home used
as the principal residence and the part used to generate income.
If you are using part of your property to generate income, the CRA will treat your entire property as your
principal residence as long as the following conditions are met:
o the part of the home producing an income in ancillary to the main use of the property as
your residence; and
o there is no structural change to the property; and
o no capital cost allowance is claimed on the property.
Furthermore, when changing the use of your property (for example, from a principal residence to a
rental property or business operation, and vice versa) , you are considered to have sold all or part of
your property even though no actual sale occurred. Every time a change is made, the sale is considered
to have happened at the property’s fair market value and to have then been immediately reacquired.
The resulting capital gain or loss for the year the change in use happened must be reported.
There are special situations in which changing the use of your property will cause the above stated rules
to not apply: (1) changing all of your principal residence to a rental or business property, (2) changing all
of your rental or business property to a principal residence, and (3) changing part of your principal
residence to a rental or business property. Please consult the Government of Canada website to see
when these three situations would qualify for the principal residence exemption.
Selling a Building
If you own a building and it is of a prescribed class, various rules exist that may change the actual selling
price amount. While all the rules are outside of the scope of this article, these come into force when two
conditions are met. First, you, or an individual with whom you do not deal with at arms length, own the
land that the building is located on or own the land adjoining the building and is necessary for the use of
the building. Second, the building is sold for less than the cost amount and capital cost.
Gifting a Capital Property
Capital property is any property that can result in a capital gain or loss when the property is sold. This
includes depreciable property—usually a capital property used to generate income from a business or
property. Individuals often own such properties and the rules surrounding capital gains on such
properties differ to those on the principal residence.
In Canada, there is no tax for any resident who receives a gift or inheritance of any amount, unless the
gift comes from an employer, or it is a tip being received due to an individual’s employment. If a capital
property (e.g., real estate, investments) is given as a gift, the receiving person will have been considered
to have sold the property at fair market value and will have to pay tax on any resulting capital gain. The
fair market value in this situation is defined as the “cost” to the person to whom shares were given.
If capital property to a person who is not considered at non-arms length, issues can arise. Subsection
69(1) of the Income Tax Act deems that when capital property is offloaded at non-arms length and for
either no profit or profit at less than fair market value, the profits will be automatically considered to be
at fair market value. Selling at less than fair market value is considered inadequate consideration for the
transaction. This can result in double taxation of the difference between the fair market value price and
the inadequate consideration.
