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Reporting Rules for the Principal Residence Exemption Have Changed

In Canada, if a property is your principal residence for every year that you owned it, you do not have to pay capital gains tax when you sell the property.

In the past, you were not even required to report the sale of a principal residence on your income tax return if the entire gain was exempt from tax. However, in October 2016, the rules changed. Now you must report the sale of any home on your taxes, including properties that are eligible for the principal residence exemption.

The reason for this change is that the Canada Revenue Agency (CRA) wants to be able to track purchases and ensure that all primary residence claims are valid. One situation that the CRA wants more information on is “house flippers.” For example, if a person purchases a condo, claims the property as their primary residence, and then sells the condo six months later, the CRA may disagree with the fact that this was a legitimate primary residence and state that capital gains taxes are owed.

To figure out if a property is exempt from capital gains taxes, it’s important to review what the CRA considers to be a primary residence.

What is a Primary Residence?

In the eyes of the CRA, a primary residence is:

  • A housing unit (house, condo, cottage, etc.) that a person acquires only to get the right to inhabit the housing unit
  • A property that you own alone or jointly with another person
  • A property where you, your current or former spouse or common-law partner, or any of your children have lived during the year
  • One that you have designated as your primary residence

You can only claim one primary residence for your family at any time and the residence must be where you or your family “ordinarily inhabited.”

What These Changes Mean

The CRA is looking for people who have bought and sold properties very quickly, who have bought and sold numerous properties in a short period of time, or who may be renting out the property that they claim to be their primary residence. If you rent a property to a tenant, then it cannot be considered your primary residence.

While the CRA does consider properties that were lived in for only a short time to be eligible primary residences, it still wants the information on each sale so that it can do a more detailed investigation. In the above example (someone who bought and sold a condo within six months) the CRA may question whether or not you actually lived in the property. You may then have to prove that you actually lived in the home in order for the principal residence exemption to apply.

If the CRA has contacted you regarding the sale of a principal residence, then you will want to speak with the trusted experts at Tax Solutions Canada for details on how to best handle this situation. We have the experience needed to assist you in communicating with the CRA in an effective manner. Please contact us today for more information.