When it comes time to sell the family home, few homeowners give any thought to the possibility of having to pay taxes on the realized profit resulting from the sale. In Canada, you are not required to pay capital gains tax on your home. However there are very specific rules around this principal residence exemption. Should you fail to follow these rules, you may be required to pay capital gains tax on all or a portion of the profit from the sale of your home.
This is more important now that the government will be tracking this information on tax return filings.
What is a Principal Residence?
First of all, the Canada Revenue Agency allows for considerable leniency regarding the type of home that can serve as your principal residence. Everything from trailers to condos are permitted, but whatever form your principal residence takes, there are four requirements all homes must meet in order to be recognized as your principal residence.
What are the four requirements of a Principal Residence?
· The home must be owned by you or jointly with another person.
· You, your current or former spouse or common-law partner, or any of your children, must have lived in the home at some point for each year that you are claiming the home as your principal residence.
· The home must be a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation acquired only to get the right to inhabit a housing unit owned by that corporation.
· You declare the home as your principal residence by listing it as your address on official documents such as your tax return.
In addition to the requirements listed above, you may only designate one principal residence per family at a time.
More than just ownership
The key point to remember is that maintaining ownership alone is not sufficient to preserve the principal residence designation. For any period that you, your spouse, or your children are not living in the property, and even if you retain ownership, the property cannot be considered your principal residence for that time period.
Consider, for example, situations where owners might not live in the property for several years; this may be the result of a temporary relocation to another area for work or schooling. During this time, unless your spouse or your child continues to live in the house, the property is not considered to be your principal residence.
This means that when you sell the property, for any year that your home is not your principal residence, you will be required to pay capital gains tax for that period. The Canada Revenue Agency has a worksheet available to help determine the taxable amount for such situations.
If you have questions on this or anything else having to do with your residence designation, see the Canada Revenue website to avoid an unexpected tax bill when you sell your home
Finally, deeming a home your principal residence is important when buying new from a builder or developer. You will qualify for the HST rebate if you move in and live there for at least a year.
More on the HST Rebate here.