When you sell your home, it may have increased in value drastically from the date you originally purchased it. As with most assets we sell in Canada, that increase is considered a ‘capital gain’, which is the increase from Day 1 to the date of sale. However, when selling your primary residence in Canada, there is an exemption from reporting this gain as taxable.
In order to ensure compliance with the rules, CRA still requires that any sale of a principal residence be reported on your tax return. The basic info required is 1) what year you acquired the property, and 2) how much you sold it for. Assuming it was your principal residence for all years you owned the property, this creates no tax consequence. The CRA simply wants to keep track of when individuals are using their exemptions.
Only one property per year, per family, can be designated as a principal residence. While there is no minimum amount of time required to live in a property to qualify as a principal residence, it must have been “ordinarily inhabited” within the calendar year. CRA will look at the intentions apparent in the individual’s actions, such as whether it was purchased as a house flip, or if something else happened to force the sale of the property. They can evaluate factors such as length of time in the dwelling, what kind of income the individual earns, and other real estate buying patterns.
Other properties such as cottages or seasonal residences can be designated as principal residences. Importantly, of course, is that the same criteria have been met – that the property was “ordinarily inhabited” during each calendar year claimed as exempt. Keep in mind, if you have owned a second property along with your home for the same years, only one may be designated as a principal residence when sold. Some determination should be made, assuming both properties qualify, as to which property has seen a larger average increase in value per year, and therefore would benefit more from the exemption.
There are other situations that could complicate matters such as renting out a portion of your home or temporarily renting it out. These may affect eligibility for the principal residence exemption, and one should consult with their tax adviser to fully understand the impacts of those situations.
Failing to report the sale of a principal residence can lead to heavy penalties from CRA, $100 per month up to a maximum of $8,000. Even worse, if not reporting the sale the owner may be denied the exemption and be required to pay tax on the capital gain.