The sale of your residential property may be exempt (or partially exempt) from taxation by the CRA if the property is designated as your principal residence. This designation is made at the time of sale or once the property is considered sold.

If your home was your principal residence for every year that you owned it, its sale would not be subject to tax, and would not need to be reported on your income tax return. However, to qualify as a principal residence, the property does not have to be where the taxpayer lives all the time. To be considered a principal residence, the following criteria apply:

  • The property is owned solely by the taxpayer, or jointly with another person;
  • The property was occupied by the taxpayer and/or his or her spouse, ex-spouse, common law partner or children during the year;
  • The property is designated by the taxpayer as his or her principal residence (specified at the time of its sale or partial sale, for the years the property was used as one.

An individual can only designate one property as your principal residence in a given year. If a property has only been your principal residence for part of the time you owned it, part of the capital gain on its sale will be taxable. This portion is determined by a formula that factors the number of years the property was designated as a permanent residence, the capital gain on its sale, and the total number of years it was owned.

As per the CRA, spouses can only designate one principal residence between them for all years after 1981. If each spouse held their own principal residence before 1982, both homes qualify for principal residence status for the years prior. This is worth considering given that properties like cottages, condominiums, trailers and even live-on boats may be considered principal residences.

Many other factors may be considered in the calculation of the principal residence deduction, including: the repurposing of property (e.g. residential-turned-commercial spaces), the rental of property previously lived in, the amount of land that can be considered part of a principal residence, the fair market value of property, etc. In addition, the CRA has become more vigilant about “house flipping” trends and the application of principal residence deduction or exemption. Many factors are evaluated before deciding whether property sales should be considered as investment income (capital gain) or as business income. They include: the length of time the home is owned, the extent of repairs and renovations, the livelihood of the property owner, the frequency with which he or she sells real estate, and so on.

To ensure that you benefit as much as possible from the principal residence deduction when selling your home, or for further information on how this might apply to a potential sale, contact HSBA Tax Services and let our tax specialist guide you.