If you’re like most Canadians, your home is your biggest asset. When the time comes to sell, you hope to get a good return on your investment. Unlike stocks & bonds, profits made from selling your family home are usually exempt from tax. However, there are a few situations that will trigger capital gains.
Principal Residence Exemption
If you sell an asset for more than you paid for it, the profit is called a capital gain. Details of the sale are included in your tax return (Schedule 3) and capital gains tax is usually applied. When you sell your principal residence (the home where you and your family live throughout the year), the details of the sale are still included in your tax return but, in most cases, any profit you’ve made is exempt from capital gains tax.
There are exceptions to the principal residence exemption. Capital gains tax may apply to the sale if
- Your home hasn’t been your principal residence for all the years you’ve owned it, or
- You’ve used part of your home for income (business or rental)
When Your Home Has Not Always Been Your Principal Residence
If you’ve sold an investment property while you’ve owned your home, you may have designated that property as your principal residence to reduce or eliminate capital gains. It can be a terrific financial move. However, when it comes time to sell your home, you may have a capital gain to report for the years it wasn’t your principal residence.
To figure out how much of your profit is subject to capital gains tax, you’ll need to do a bit of extra paperwork. Crunch the numbers on Form T2091 (IND) to determine your tax liability.
When You’ve Used Part of Your Home for Income
Did you rent out part of your home to bring in extra income? Was your home your primary place of business? If your home pulled double duty while you owned it, capital gains tax may apply to the portion of the home used to produce income. Basically, the profits of your sale are split between the part you used to make money and the rest of the home. The part that didn’t earn income is exempt. The part that did isn’t.
How do you know how much to assign to each side of the split? The Canada Revenue Agency leaves that up to you, saying that “You can do this by using square metres or the number of rooms, as long as the split is reasonable.” The Canada Revenue Agency’s web page provides a step-by-step example of how to dispose of a principal residence partly used for earning income.
In some circumstances, even if you rented out part of your home, you may still qualify for a full exemption. Visit our tax tip Renting Out a Portion of Your Home for details.