What Is Capital Gain Tax?
If you sell your property for more than you paid for it, the profit you make is called a capital gain. Luckily, in Canada, the capital gain earned from selling your principal residence (usually your primary home) is tax-free in most cases. Although details of the sale must be reported on your tax return, principal residence exemption keeps your profits in your pocket (special rules apply if you’ve rented out your home or used it for business purposes).
What Is a Principal Residence?
Simply put, your principal residence (PR) is your main home. It’s where you live the majority of the time. Your principal residence could be a house, cottage, condominium, a trailer, mobile home or even a houseboat.
The property must meet the following four conditions:
- It’s a residence you acquired only with the intention of living in it.
- You own the property alone or jointly with another person.
- You, your current or former partner, or any children lived in it at some point during the year.
- You designate the property as your principal residence.
Designating a property as a principal residence occurs when you sell or are considered to have sold all or part of the property. You can designate your home for each of the years that you owned and used it as your principal residence (you’re limited to having only one PR per year – no switching mid-year).
Only one residence per year is designated as the principal between spouses. In other words, you and your spouse have to have the same property designated to both of you.
How to Save Money by Changing Your Principal Residence
If your summer home has increased significantly in value over the years, changing your PR could lead to big savings at tax time. All of your profit could be exempt from capital gains tax.
For example, imagine you own a house in the city and a cabin in cottage country. The housing market in the city is slow so your house hasn’t gone up too much in value since you bought it. Prices around the lake however are at an all-time high so you decide to sell the summer place. If the property values of the cabin increased higher than the house, it makes sense to designate the cabin as your principal residence. This makes your profit exempt from capital gains tax.
Once the cabin’s sold, you would then designate the house as your principal residence. From that point on, all the years you keep the house as your PR; any gains will be exempt from capital gains tax. Keep in mind that any earlier increase in value (during the time your cabin was your PR) will not be exempt.