According to Canadian tax rules, a home can be designated as a principal private residence for each year in which a taxpayer, their spouse, common-law partner , or their children were residents in Canada. Virtually any type of physical residence qualifies, including houses, apartments, duplexes, cottages, houseboats, trailers, or mobile homes.
The land on which the dwelling sits also qualifies for the exclusion within certain limits— up to 1. This limit may be extended in certain cases if the municipality imposes a minimum lot size. As of the tax year, Canadian taxpayer-homeowners were required to report basic information on their principal private residences to qualify for the exemption.
That includes the date of acquisition, date of sale, proceeds of disposition , as well as a description of the property on their income tax and benefit return. This reporting requirement has applied to every property sold in Canada since , even if the entire gain is fully protected by the principal private residence exemption.
The principal private residence is exempt from capital gains tax. However, taxpayers who sell their principal residence must still report the sale. The federal government allows taxpayers to designate two properties as principal residences when they sell one and purchase another during the same year.
The taxpayer must designate and report both. This rule is called the "plus 1" rule. If someone is unable to designate a home as their principal residence for all the years it is owned, a portion of any gain on its sale may be subject to tax as a capital gain. The portion of the gain subject to tax is based on a formula that takes into account the number of years the home was owned by the taxpayer and how many of those years it was designated as a principal private residence.
For example, suppose a married couple owns two residences between them—a home in the city and a cottage in the countryside. Only one of these homes can be designated as a principal residence for each year. Before , each spouse could designate a separate property as a principal residence for a particular year, provided the property was not jointly owned. However, that loophole was closed. Couples and their unmarried minor children can now only designate one home in total as their principal private residence each year.
Taxpayers who use part of their residence for business purposes must reasonably split the selling price and the adjusted cost base ACB between the portions used as a residence and to produce income. The CRA may consider the property as a residence if the business is secondary to the use of the house as a principal residence, there are no structural changes to the property, and there is no capital cost allowance CCA claimed against the property.
One example that fits this description is a home daycare facility. Real Estate Investing. This is where it gets interesting. As a result, for the years of concurrent ownership, applying the PRE to the cottage would generate the highest tax savings. RRSP contributions. Since only half the capital gain is taxable, their total contribution room needs to be only half the total gain not covered by the PRE.
Remember, if they sell the cottage after Dec. Charitable donations. Life insurance. If they chose to use the PRE for the city house, insurance could provide funds to cover the anticipated tax liability on the cottage. The tax liability is half the total unprotected capital gain multiplied by their marginal tax rate.
A joint last-to-die policy would pay out when the second spouse dies and the tax liability comes due. When selling one or more eligible properties, allocating the PRE can be challenging. From sports memorabilia to vintage cars, treasured items require special attention. The loss of that loathsome ritual may be contributing to stress. These choices will be signaled globally to our partners and will not affect browsing data.
We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. What Is a Principal Residence? When a principal residence is sold, the seller may qualify for a tax exclusion.
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