Disposing 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.
Starting January 1, 2023, any gain from the disposition of a housing unit (including a rental property) located in Canada, or a right to acquire a housing unit located in Canada, that you owned or held for less than 365 consecutive days before its disposition is deemed to be business income and not a capital gain, unless the property was already considered inventory or the disposition occurred due to, or in anticipation of one of the following life events:
- the death of the taxpayer or a related person
- a related person joining the taxpayer’s household or the taxpayer joining a related person’s household (for example, moving in with a spouse or common-law partner, for the birth of a child, adoption, or care of an elderly parent)
- the breakdown of a marriage or common-law partnership where the taxpayer had been living separate and apart from their spouse or common-law partner for at least 90 days before the disposition
- a threat to the personal safety of the taxpayer or a related person (for example, domestic violence)
- a serious disability or illness of the taxpayer or a related person
- the eligible relocation of the taxpayer or their spouse or common-law partner where the taxpayer’s new home is at least 40 kilometres closer to the new work location or school (generally, an eligible relocation allows the taxpayer to carry on business, be employed or attend full-time post-secondary education)
- the involuntary termination of employment of the taxpayer or their spouse or common-law partner
- the insolvency of the taxpayer
- the destruction or expropriation of the taxpayer’s property (for example, when the property is destroyed due to natural or man-made disaster)
A loss from a business in respect of a flipped property, if any, is deemed to be nil.
If the property is not considered flipped property, whether the income from selling the property should be treated as business income or as a capital gain depends on the specific details of the situation. If the disposition is considered:
- a capital gain, complete Schedule 3, Capital Gains (or Losses)
- business income, complete Form T2125, Statement of Business or Professional Activities.
For more information about flipped property, go to Residential Property Flipping Rule or see Schedule 3.
For more information about business income, go to Business income or see Guide T4002, Self-employed Business, Professional, Commission, Farming Income.
Reporting the sale of your principal residence
If you sold or if you were considered to have sold your property in 2023 and it was your principal residence, you have to report the sale and designate the property on Schedule 3, Capital Gains (or Losses). In addition, 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(IND) if the property you sold was your principal residence for all the years you owned it, or for all years except one year, being the year in which you replaced your principal residence.
Why you have to report the sale
Effective 2016 and subsequent taxation years, the CRA will only allow the principal residence exemption if you report the disposition and designation of your principal residence on your income tax and benefit return. If you forget to make this designation in the year of the disposition, it is very important to ask the CRA to amend your income tax and benefit return for that year. The CRA will 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 2023. 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 2023 and took possession of it as his principal residence in March 2023.
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 17900 on page 2 of Schedule 3 to designate property 1 as his principal residence for all years including 2023 (or for all years except one year).
In addition, John will need to complete the first page of Form T2091(IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust), assuming he finally sold property 1 before the end of 2023. However, John should keep his decision in writing for future reference, especially for when he sells property 2.
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 tax 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). You are also required to complete the applicable sections of Schedule 3 as indicated on page 2 of the schedule.
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 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.
The CRA 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 or if you were considered to have 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 calculate the amount of capital gain, if any, to report on line 15800 of Schedule 3, Capital Gains (or Losses).
In 2023, Jackie disposed of 3 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 2023. Jackie must tick box 3 at line 17900 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 13800 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 that provides information on how to calculate the capital gain and your reporting requirements for the sale.
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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