Sale of your principal residence
When you sell your home or when you are considered to have sold it, usually you do not have to pay tax on any gain from the sale because of the principal residence exemption. This is the case if the property was solely your principal residence for every year you owned it.
Reporting the sale of your principal residence
Before 2016, if you sold your property, and it was your principal residence for every year you owned it, you did not have to report the sale to claim the principal residence exemption.
For dispositions in 2016, you had to report the sale and designate the property on Schedule 3, Capital Gains (or Losses) in all situations.
For dispositions in 2017 and later years, in addition to reporting the sale and designating your principal residence on Schedule 3, you also have to complete Form T2091(IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust). Complete only page 1 of Form T2091 if the property you sold was your principal residence for all the years, or for all but one year, that you owned it.
Why you have to report the sale
For the sale of a principal residence in 2016 and subsequent years, we will only allow the principal residence exemption if you report the disposition and designation of your principal residence on your income tax return. If you forget to make this designation in the year of the disposition, it is very important to ask us to amend your income tax return for that year. Under proposed changes, we will be able to accept a late designation in certain circumstances, but a penalty may apply.
John (a resident of Canada) put his principal residence (property 1) up for sale in January 2017. Property 1 has been John’s only principal residence for all the time he has owned it. He purchased a new house (property 2) in February 2017 and took possession of it as his principal residence in March. There is a special rule (the “plus 1” rule) that allows a taxpayer to treat both properties as eligible for the principal residence exemption for a year where one residence is sold and another is purchased in the same year, even though only one of them may be designated as such for that year. For this reason, John can tick box 1 at line 179 on page 2 of Schedule 3 to designate property 1 as his principal residence for all years including 2017 (or for all years except one year). In addition, John will need to complete the first page of Form T2091(IND), assuming he finally sold property 1 before the end of 2017. However, John should keep his decision in writing for future reference, especially for when he sells property 2.
Under proposed changes, for dispositions that occur after October 2, 2016, for a taxpayer to be eligible for the "plus 1" rule, the taxpayer must be resident in Canada during the year the principal residence is purchased. Therefore, if a taxpayer is non-resident throughout the taxation year in which the property was purchased, the taxpayer will not be eligible for the extra year in calculating the principal residence exemption amount.
If your home was not your principal residence for every year that you owned it, you have to report the part of the capital gain on the property that relates to the years for which you did not designate the property as your principal residence. To do this, complete Form T2091(IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust). You are also required to complete the applicable sections of Schedule 3 as indicated on page 2 of the schedule. If you are the legal representative for a deceased person, you can designate a property using Form T1255, Designation of a Property as a Principal Residence by the Legal Representative of a Deceased Individual.
If only a part of your home qualifies as your principal residence and you used the other part to earn or produce income, you have to split the selling price and the adjusted cost base between the part you used for your principal residence and the part you used for other purposes (for example, rental or business). You can do this by using square metres or the number of rooms, as long as the split is reasonable. See Did you file Form T664? if you filed a capital gains election on the property you disposed of. If you did file Form T664 you may need to complete the T2091(IND)-WS , Principal residence worksheet.
We will consider the entire property to maintain its nature as a principal residence in spite of the fact that you have used it for income producing purposes when all of the following conditions are met:
- The income producing use is ancillary to the main use of the property as a residence.
- There is no structural change to the property.
- No capital cost allowance is claimed on the property.
This situation could occur, for example, where the property is used as a home day care. For more information, see Income Tax Folio S1-F3-C2, Principal Residence.
If you sold more than one property in the same calendar year and each property was, at one time, your principal residence, you must show this by completing a separate Form T2091(IND) for each property to designate what years each was your principal residence and to calculate the amount of capital gain, if any, to report on line 158 of Schedule 3, Capital Gains (or Losses).
In 2017, Jackie disposed of three properties. Property 1 was acquired by Jackie in 2000 and he designated it as his principal residence from 2000 to 2005. He acquired Property 2 in 2006 and he designated this property as his principal residence from 2006 to 2010. Jackie acquired Property 3 in 2011 and he designated it as his principal residence from 2011 to 2017. Jackie must tick box 3 at line 179 on page 2 of Schedule 3, complete a separate Form T2091(IND) for each property, and report the capital gains (if any) on Schedule 3.
Completing your Schedule 3
Report on line 138 of Schedule 3 only the gain on the part you used to produce income. You are also required to complete page 2 of Schedule 3 to report the sale of your principal residence. For information on how to report the gain see Real estate, depreciable property, and other properties and Income Tax Folio S1 F3 C2, Principal Residence. You will also find an example showing how to report the capital gain on a disposition of land and building for a principal residence partly used for earning income.
Forms and publications
- Guide T4036, Rental Income
- Guide T4037, Capital Gains
- Form T1255, Designation of a Property as a Principal Residence by the Legal Representative of a Deceased Individual
- Form T2091(IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust)
- Form T2091(IND)-WS, Principal residence worksheet
- Income Tax Folio S1-F3-C2, Principal Residence
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