Principal Residence
In Canada, a principal residence, commonly known as a primary home, can utilize the Principal Residence Exemption (PRE) to potentially exempt some or all capital gains tax when sold. Types of properties that can qualify as a principal residence include:
- Detached houses
- Cottages
- Condominium units
- Apartment units in a building
- Units in a multiple apartment building
- Trailers, mobile homes, or houseboats
To designate a property as a principal residence, the following conditions must be met:
- It must be a housing unit, a leasehold interest in a housing unit, or shares in a cooperative housing corporation acquired for the right to inhabit its residential units.
- You must own the property alone or jointly with another person.
- Housing unit must be ordinarily inhabited in the year by the taxpayer or by his or her spouse or common-law partner, former spouse or common-law partner, or child.
- You must designate the property as your principal residence.
The land where your residence is located can be part of your principal residence in Canada. Typically, up to half a hectare (1.24 acres) of land can be considered as part of the principal residence. However, more land can qualify if it’s necessary for the use and enjoyment of the residence, such as when municipal laws require larger plot sizes.
Owning property (ownership) is crucial for qualifying as a principal residence. This can be sole or joint ownership, including beneficial ownership.
There’s no specific duration for how long a house must be lived in to qualify as a principal residence. According to the Ministry of Finance, one day is not sufficient. The CRA indicates that a short period, as long as it’s not for income generation, can qualify. This could be weeks or months, provided the purpose is personal or family residence. The residence must be “ordinarily inhabited,” and merely changing address for license or government records is insufficient.
Properties outside Canada can also qualify as a principal residence if these conditions are met.
Principal Residence Exemption
The Principal Residence Exemption (PRE) and reporting requirements in Canada have evolved. Prior to 2016, Canadians didn’t need to report the sale of their principal residence to the Canada Revenue Agency (CRA) if it was designated as such for the entire ownership period. However, since January 1, 2016, details such as address, purchase date, sale date, and amounts, along with the PRE claim, must be disclosed when filing personal taxes. The deadline is April 30, and penalties for non-disclosure can reach $8,000.
Each taxpayer and their spouse can designate one property per year as their principal residence. The property must be ordinarily inhabited by you, your spouse, or your children in that year. When selling, you can choose to exempt all or part of the capital gains for the years the property was designated as your principal residence. The formula used is:
(Designated years as PR + 1) / Total ownership years x Capital gain from the sale
In this example, if you’ve owned your residence for 10 years but designated it as your principal residence for only 7 years, and you earn a $500,000 profit from its sale, the calculation for the Principal Residence Exemption (PRE) would be:
(7 years designated as PR + 1) / 10 years of ownership x $500,000 capital gain = $400,000
This means, out of the total $500,000 profit, $400,000 is exempt under the PRE. You would only need to report $100,000 as capital gains in your personal tax for that year.
Non-tax residents in Canada can own a principal residence in the country and meet the same conditions as tax residents. However, they are not eligible for the Principal Residence Exemption (PRE). This means that even if a non-tax resident owns a principal residence in Canada, capital gains tax must be paid upon sale. If you were once a tax resident with a principal residence in Canada and retained this property after leaving, you can still enjoy the PRE for the period you were a tax resident. The previously mentioned formula can be used to calculate the PRE for non-residents in this situation.