Once you have sold your home, in most cases you are not liable for taxes on any profit gained from the sale. This is due to the “Principal Residence Exemption”. However, this exemption only applies if it was your principal residence for the entire period.
How To Report the Sale of Your Principal Residence
- You must first report the sale on a Schedule 3 (Capital Gains and Losses) form. You must also complete form T2091 (Designation of a Property as a Principal Residence by an Individual [Other Than a Personal Trust]). If the property was your principal residence for all of the years that you owned it, or for all years except the one in which you sold it, you only need to fill out the first page of the form.
- Since 2016, the principal residence exemption can only be claimed if the sale is reported on your income tax return. While the CRA can amend these forms in certain circumstances, a penalty may be applied.
- If you did not use the property as your principal residence for the entire time you owned it, the time period in which you did not must be noted on your capital gains form (known as a Schedule 3 form).
Sometimes only part of your home may be used as your principal residence-such as if you were using another portion of your home as part of a commercial work space, in order to produce income for yourself. In this case, the total selling price must be split between the portion used as your residence and the portion used to generate income. This is normally calculated using square metres or the number of rooms.
Under certain circumstances, the CRA will allow an entire property to be considered eligible for a principal residence exemption even if income was generated there. In order for this to occur, all three of the following conditions must be satisfied:
- No structural changes have been made to the property.
- No capital cost allowance is claimed.
- The income generated is necessary as part of the property’s use as a residence.
For more info, visit the CRA’s page on principal residences: Income Tax Folio S1-F3-C2, Principal Residence.