Do You Qualify for the Residential Capital Gains Tax Exemption?

Posted by Edmonton on Tuesday, May 4th, 2021 at 8:14am.

Do I qualify for the residental capital gains tax exemption?Home prices tend to rise over time, so when you sell a home you've owned for a while, you may turn a profit. You have a capital gain. In Canada, taxes must be paid on most capital gains.

However, there's an exception available to most Canadian homeowners called the Principal Residence Exemption (PRE). It says that homeowners don't have to pay capital gains tax on a home that has been their principal residence. Most people who've lived in their homes are eligible for PRE, but there are still conditions homeowners must meet.

If the home was not the owner's principal residence the whole time, the owner might have to pay part or all of the capital gains tax. If it was a money-making property, the owner has some tax to pay. Even if a homeowner is PRE-eligible, they must report the sale of their home to the CRA. This reporting has been required since 2016.

Here are some more things to know about capital gains tax and the PRE.

For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any real estate transaction.

All Kinds of Dwellings Are Eligible

The PRE isn't limited to single-family houses. Your home also can be a townhouse or a condominium. It can be a mobile home or even a houseboat. If that's where you live, and you own it, it can be eligible.

In fact, it doesn't even have to be located in Canada.

One Residence Per Family

Before 1982, a husband and wife could each have a principal residence, and each could claim the PRE when they sold. Since then, however, a family can have only one principal residence each year. A family consists of the owner, their spouse or domestic partner, and their children under 18.

Cannot Be An Income Earning Property

If it's a rental property or a place of business, the owner can't get the PRE, even if they live there. For example, if they live in one unit of a 4-plex and rent the other three, they can't claim the exemption.

What if the property has gone back and forth between residence and rental over the years? In that case, every time the status changes, the CRA deems that the owner has sold it and re-acquired it at the market rate.

If the owner kicks out their renters and moves back in there themselves, they must report it as a sale and pay capital gains tax that year. However, the owner pays the tax only on the appreciation in the years that the property earned income.

Does Not Include Surrounding Land

This restriction applies to farmers and also to anyone else with a large tract of surrounding land. Owners can claim the exemption for only one-half hectare of land. That's about 1.2 acres. For farmers, that's only the farmhouse and its immediate surroundings, not the entire spread. In a few exceptional cases, a larger plot of land can be included if it's required for the enjoyment and use of the property, such as for access to a public road.

Definition of Residence

On the surface, the definition is simple. A home is a principal residence for a calendar year if the homeowner “ordinarily inhabited” it during that year. Whatever place the owner lived in most of the time is their principal residence.

However, the CRA has taken note that some people buy houses and live in them only briefly with the intention of “flipping” them for a profit. This is considered a business and is not eligible for PRE. If the CRA suspects that the owner is doing this, they'll look at their income and real estate buying history to see if what they have is actually a business venture.

What if you rent the home out for a few weeks while you're gone in the summer? That can be OK. That kind of short-term rental does not make your property ineligible for PRE.

Capital Gains on Homes That Are Not a Primary Residence

Second homes and vacation homes, as they aren't the homeowner's primary residence, are not eligible for the PRE. However, sellers do have options to mitigate capital gains taxes on these homes. Be sure to research and understand capital gains taxes applicable to your particular home before going through the selling process. Getting professional advice from a financial planner or real estate agent can help.

For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any real estate transaction.

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