The Principal Residence Exemption

When you sell personal use property such as a car, jewelry, or furniture for more than you paid for it, you have to report and pay income tax on the net capital gain. The definition also includes real property, including the principal residence you own.

The Income Tax Act provides a principal residence exemption for capital gains on the sale of your home.

If the home has been your principal residence for the entire time you have owned it, the principal residence exemption eliminates the capital gain and there is no need to report the sale on your tax return.

What Is A Principal Residence?

Your principal residence is a housing unit that you own outright (individually) or jointly with another person. This includes a house, cottage, condominium, apartment, duplex, or mobile home. It also includes a share in capital stock of a cooperative housing corporation that you have acquired that give you the right to inhabit the property. It may even include houseboat!

The home can have up to 1/2 acre of adjacent connected land. In some cases more land may be included in this definition if it was necessary for the use and enjoyment of the house.

Ownership itself is not enough to qualify the property as your principal residence. You, or a member of your family, must also ordinarily occupy the property and you must designate the property as your principal residence (see Reporting The Capital Gains Exemption below).sleeping-room

Who Can Claim The Exemption?

In the past, both spouses’ were each allowed to claim a principal residence exemption. This meant that a married couple could have had two different properties and each spouse could have claimed a tax-free capital gain exemption on both properties.

This all changed in the early 1980’s when the Income Tax Act was changed so that only one property could be designated as the principal residence exemption for each family unit and for each year after 1981.

If a married couple purchased a properties before 1982 that qualified as their principal residences, they can claim the exemption on both properties up to 1981 and on only one after 1981.

Reporting The Capital Gains Exemption

You designate a property as a principal residence using CRA form T2091. However, you only have to report the sale to the CRA if there is still a capital gain after you have applied the principal residence exemption.

Calculate The Principal Residence Exemption

For formula used to calculate the principal residence exemption is:

[(1 + # of years the home was your principal residence) / # years you owned the home] x The Capital Gain

The extra “1” in the formula provides an allowance for the tax year in which you sell your principal residence and purchase another in the same year.

NOTE: A capital loss that results from the sale of the principal residence or any personal use property is not allowed under the Income Tax Act.

We Can Help You Can Pay Less Tax

Call us today at (289) 288-1206 to email us to arrange your appointment. We provide professional income tax preparation and planning to help you keep more of your hard earned money. Our services are available in our offices or in your home.

Dean Paley

A graduate of Simon Fraser University, Dean started and operated an independent painting company while perusing a degree at SFU. After graduating from Simon Fraser, Dean entered the Certified General Accountants Program of Professional studies where he obtained the professional CGA designation. After a number of successful years as the head of finance for the Canadian operations in a global financial services firm, Dean moved into a marketing role and established and launched a tax, estate and financial planning support department and service to advisors and clients. During this time Dean successfully obtained the Certified Financial Planner (CFP) designation. Dean has been a member of the Canadian Forces Reserve spanning three decades serving in the Royal Westminster Regiment (B.C.), the Military Police and later as a commissioned officer in the Cadet Instructors Cadre in Hamilton Ontario. Dean Paley CGA CFP has been interviewed and quoted in major media such as the National Post, Financial Post, Toronto Star, Canadian Business, Money Sense and Investment Executive. Dean is married to his lovely wife Deborah and has four lovely children.