Do I Have to Pay Tax on the Sale of My Home?
Are You Required Pay Tax On The Sale Of Your Home?
Paragraph 40(2)(b) of the Income Tax Act provides that a Canadian resident is not taxable on a capital gain from his principal residence; essentially the entire amount of the profit from the sale of a personal principal residence is exempt from taxation. Known as the “Principal Residence Exemption”, you do not have to pay tax on the capital gain realized on the sale of your home if your home is considered your principle residence for every year of ownership.
Generally, you will be able to take advantage of the principle residence exemption if the following conditions, found in s.54 of the Income Tax Act, are met:
- The property being sold is either a house, apartment, cottage, trailer/mobile home, or houseboat;
- You own the property alone or jointly with another person;
- You or certain family members ordinarily inhabit the property at some point during the year (you or your family member will not be considered to ordinarily inhabit the property if it is determined that the primary use of the property is to produce income);
- You report the sale and designate the property as your principle residence on Schedule 3, Capital Gains (or Losses), of your T1
- You must also complete Form T2091, Designation of a Property as a Principle Residence by an Individual, after the sale of your property
It is important to note that you and your spouse/common-law partner are only able to designate one property as your principle residence each year. That said, if you sell your principle residence and purchase another property in the same year, you will be able to claim the principle residence exemption for both properties that year.
Change of use of principal residence
Under the Income Tax Act, you can be considered to have sold all (or part) of your principal residence even though if you didn’t actually sell it. This can occur if you convert all or part (e.g. the basement) of your principal residence to a rental property or conversely, decide to move into a property that you formerly rented out.
The tax rules state that each time you change the use of a property, you are considered to have sold the property at its fair market value and to have immediately reacquired the property for the same amount, which becomes your new tax cost of adjusted cost base. As a result, the general rule is that upon such a change in use, you are required to report the resulting capital gain (or, in some cases, capital loss) in the tax year this change of use occurs.
Not to fret however. If the property was your principal residence prior to the change of use, you don’t have to pay tax on any accrued gain.
There is some more good news. When you change your principal residence to a rental property, you may be able to make a special tax election to not be considered to have changed your use to rental property. If you do so however, you will lose your ability to claim any depreciation – known as capital cost allowance (CCA) – as a deductible expense.
While your election is in effect, you can designate the property as your principal residence for up to four years, even if you don’t use your property as your principal residence; however, you can only do this if you don’t designate any other property, such as a vacation home or cottage, as your principal residence during this period of time. If you make this election and then move back into your residence, there are no immediate tax consequences as a result of moving back.
Finally, what if you decide to convert only part of your principal residence into a rental property? While technically the change of use rule above applies, the CRA will consider you to have not changed its use if your rental use of the property is “relatively small in relation to its use as your principal residence,” you don’t make any structural changes to the property and you don’t deduct any CCA on the part you are using for rental purposes.
Caution – Consult Your Tax Advisor
If you own multiple properties, change your use of your property or are considering operating a home office out of your home, it is important to consult your tax advisor or lawyer to ensure that you continue qualify for the principle residence exemption to neutralize the tax on the sale of your property.
-Shira Kalfa, BA, JD, Partner and Founder
Shira Kalfa is the founding partner of Kalfa Law. Shira’s practice is focused in corporate-commercial and tax law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law. Shira graduated from York University achieving the highest academic accolade of Summa Cum Laude in 2012. She graduated from Western Law in 2015, with a specialization in business law. Shira is licensed to practice by the Law Society of Ontario. She is also a member of the Ontario Bar Association, the Canadian Tax Foundation, Women’s Law Association of Ontario, and the Toronto Jewish Law Society.
© Kalfa Law 2018
The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.