Recently I have received a few questions about the tax rules surrounding your principal residence. The general idea behind the Principal Residence Exemption is that you are not taxed on gains you realize when you sell your residence. But like many tax guidelines in Canada the rules are more complicated than that to ensure that people do not abuse them.
The first issue is what qualifies as a principal residence. The basic rules are it must be a house or housing unit, you or your spouse/partner must inhabit it at some point during the year, and you must designate it your principal residence. Also note, an individual or married couple may only have one principal residence. The rules are a little more specific than that, but in most cases and for our purposes this basic understanding is sufficient.
In certain cases when there is a large portion of land attached to the house, the CRA may only allow the Principal Residence Exemption to a portion of the land, 1.25 acres is often the cap. If land bigger than 1.25 acres is not sub dividable and has no commercial uses it is usually allowable under the exemption.
If the home was not your principal residence for the entire time it is owned there is a calculation that is used to determine the taxable portion of the gain and the amount that qualifies for the Principal Residence Exemption:
The calculation is as follows:
(Number of years as principal residence + 1 year)x(Capital Gain)
Number of years the property was owned
Let’s look at an example to see how the formula works, let’s assume these facts:
(5 years as principal residence + 1 year) x 100,000 =$85,714
This results in an exemption of $85,714 leaving a capital gain of $14,286 (100,000 – 85,714), and taxable capital gain of $7,143 (50% of capital gains are taxable). The extra year that is added to the number of years as principal residence is so that when someone moves, both the old house and the new house will be counted as a principal residence for that year.
These are just the basic rules relating to the Personal Residence Exemption. There are more detailed rules for other issues such as change of use from rental to residence, or residence to rental, and elections that need to be made in these instances. If you have any questions related to the principal residence exemption and what proportion you are eligible for, or if you want the peace of mind having a Chartered Accountant make these calculations for you, please contact us at firstname.lastname@example.org , 604 510-0156, or visit our website at https://wattsca.ca for more information.
Disclaimer: The information in the blog is for general information only and is not intended to be a substitute for professional advice. Each person’s situation is unique, and a designated professional accountant can assist you in using the information on this blog to your best advantage. The author of this blog strives, but does not guarantee, to provide information which is current and accurate. Due to the nature of the information, it should not be relied upon for decision making without talking to a designated professional accountant. By obtaining information from this blog, you fully release Steve Watts, Chartered Accountant of any liability that may arise from using this information.