For many Canadians, it’s the biggest tax break of all. When you sell your principal residence, capital gains are exempt from tax. But homeowners selling since January 1, 2016, have to jump through a few hoops to get the exemption.
Here’s what you need to know.
Typically, people claim the principal residence exemption on a house or condominium that they own or co-own, but vacation property, a mobile home or even a houseboat can qualify.
You, your spouse or one of your children must have ordinarily inhabited the property during any year it’s designated as a principal residence. In addition, only one home per family can qualify in any given year.
Previously, a homeowner didn’t need to report the sale to receive the exemption. As of the 2016 tax year, you must report the sale on Schedule 3 of your tax return. If you fail to report it in the year of the sale, you can amend your return but a penalty may apply.
If you sold your home in 2016 and didn’t report the sale on your return, however, you’re probably okay. During this “communication period,” the Canada Revenue Agency has indicated that “the penalty for late-filing a principal residence designation will only be assessed in the most excessive cases.”¹
The rules around trusts have also changed. Previously, a principal residence held in virtually any kind of trust could qualify for the exemption. Now, the exemption is available only for “eligible trusts.” These include spousal or joint spousal trusts, alter ego trusts, certain disability trusts and qualifying trusts for minor children of deceased parents but not traditional family trusts for children or grandchildren.
If you want to find out more about the principal residence exemption rules, please talk to us, your lawyer or your tax advisor.
¹ Canada Revenue Agency “Reporting the sale of your principal residence for individuals” at cra.gc.ca (accessed May 2017).