Some Canadians may have questions about their principal residences and what owning such a property means to them taxwise. Firstly, in Canada, a principal residence is classified as any residential property you or your family owns and occupies at any time in a given year. So, even a boat or trailer can be considered a principal residence.
Revamped tax rules announced by the federal government in 2016 tightened the guidelines around homeowners being able to claim the capital gains tax exemption on a principal residence.
The Status Quo
No changes were made to the principal residence exemption. Profits earned on the sale of your home is still tax-sheltered. What did change, however, is what you must report to the Canada Revenue Agency (CRA) when you file your tax return. It used to be that if you sold your primary home, you didn’t have to report it on your income tax return. You now have to let the government know the particulars of the deal—things like the sale date, the acquisition date, the proceeds of the sale and a description of the property.
How to Go About Reporting
Once your home sells, you have to fill out a Schedule 3 form and file it with your T1 Income Tax and Benefit Return. If you don’t do this, there is no immediate penalty, but if you get audited and failed to do so, the CRA could slap you with penalties and interest on taxes you may be owing.
If you also earned income from the property, you will have to fill out Form T2091 (or Form T1255) which allows you to let the CRA know what years the property was not your principal residence for all of the years you owned it.
In order for your home to be eligible for the principal residence tax exemption you must also adhere to a few other CRA stipulations:
- There can only be one principal residence per family;
- You or your family must live in the residence;
- There are choices. You have the choice of designating a seasonal residence like a cottage as your principal residence. You might want to talk to a tax specialist about the advantages of that choice;
- The property can’t make you money. If you own a property with the prime aim of making income, it can’t be considered a primary residence;
- The size of land on which the residence sits can’t be more than 1.2 acres unless you prove the extra land was required for your use and overall enjoyment of the property;
- The property you claim as your principal residence does not have to be in Canada.
This article is intended for informational purposes only and should not be construed as professional advice.