Individuals who sell their principal residence are required to report the sale in their personal income tax return and assess whether they may be able to designate the principal residence exemption to eliminate any potential income tax consequences. These rules have come into effect for dispositions starting with the 2016 taxation year, and they include reporting for deemed dispositions such as a change in the use of the property. Failure to report the disposition of a principal residence may result in a penalty of the lesser of a) 100 per month from the due date of the tax return; and b) $8,000.
In order to qualify for the principal residence exemption, certain conditions must be met, as follows:
- The taxpayer owns the property, either jointly or otherwise;
- The property is a housing unit such as a house, an apartment, a cottage, or a share of the capital stock of a cooperative housing corporation;
- The taxpayer has ordinarily inhabited or lived at the house at some time during the year;
- The property is situated on land which does not exceed one-half hectare unless the excess land is necessary for the use and enjoyment of the principal residence; and
- One principal residence exemption is available per family unit for each taxation year.
If an individual owns multiple properties and sells certain properties at certain times, a principal residence exemption analysis should be performed to determine the most beneficial outcome for income tax purposes.
Assume, for example, that David sells two properties during the 2022 tax year, as follows:
Principal residence – sale price of $815,000 (purchased for $625,000 and owned for 10 years)
Cottage – sale price of $520,000 (purchased for $40,000 and owned for 20 years).
Since the average annual gain per year is the highest for the sale of the cottage (gain of $24,000 for the cottage compared to $19,000 for the house), David should designate his principal residence exemption on the cottage for all 20 years owned. This would result in a capital gain of $190,000 on the sale of his house, half of which would be taxable at his marginal tax rate in his personal tax return. This outcome would be more beneficial than reporting a capital gain of $480,000 on the sale of his cottage, half of which is subject to tax.
Certain additional tax planning strategies should be considered such as the use of any potential loss carry forward balances, if available, maximizing the costs used to reduce the gains (such as major improvements or renovations), or contributing a portion of the proceeds to the individual’s RRSP account, assuming there is enough room available, to benefit from tax savings.
At Lorena Boda CPA Professional Corporation, we would be happy to assist with assessing your tax situation.