On Posted on by Dellendo Farquharson to Accounting and Tax, Personal Taxes, Tax Planning & Management

How Do I Report the Sale of My Principal Residence in Canada?

In Canada, the sale of a principal residence is typically exempt from capital gains tax. However, even if the sale is fully exempt, you are still required to report it on your tax return. This requirement was introduced by the Canada Revenue Agency (CRA) in 2016 to ensure compliance and transparency in real estate transactions.

This comprehensive guide will walk you through the steps for reporting the sale of your principal residence, explain the exemptions available, and provide examples to make the process easy to understand.

What Is a Principal Residence?

A principal residence is a property that you, your spouse, or your children ordinarily inhabit during the year. It can be any type of residential property, such as:

  • A house
  • A condominium
  • A townhouse
  • A cottage
  • A mobile home

To qualify as a principal residence, the property must meet the following criteria:

  1. You or your family must have lived in it during the year.
  2. It must not have been primarily used to generate rental or business income.
  3. Only one property per family can be designated as a principal residence for a specific year.

Example:
If you own both a house and a cottage, you can designate only one of them as your principal residence for a given year.

Do I Need to Report the Sale of My Principal Residence?

Yes, the CRA requires you to report the sale of your principal residence on your tax return, even if it is fully exempt from capital gains tax. This rule ensures that the CRA can verify whether the property qualifies for the principal residence exemption (PRE) and that no taxable capital gain arises from the sale.

Failure to report the sale could result in penalties, including a fine of $100 per month (up to $8,000) for late reporting, even if no tax is owed.

How to Report the Sale of Your Principal Residence

Reporting the sale of your principal residence is a straightforward process, but it’s essential to follow the correct steps to avoid penalties. Here’s a detailed breakdown:

Step 1: Gather the Necessary Information

Before reporting the sale, collect the following details about your property:

  • The year you purchased the property.
  • The purchase price of the property.
  • The sale price of the property.
  • The date of the sale.
  • The number of years you are designating the property as your principal residence.

Keep documents such as purchase agreements, sale agreements, and any receipts for significant renovations, as these may be required to support your claim.

Step 2: Complete Schedule 3

When filing your tax return, use Schedule 3 – Capital Gains (or Losses) to report the sale of your property. In this section:

  1. Indicate that the property is your principal residence.
  2. Provide the year of acquisition and the year of sale.
  3. Report the sale price, even if it’s fully exempt from capital gains tax.

Step 3: Fill Out Form T2091 (IND)

Complete Form T2091 (IND) – Designation of a Property as a Principal Residence by an Individual (Other than a Personal Trust) to designate the property as your principal residence for the years you owned it. This form calculates the portion of the capital gain eligible for the exemption.

If you’ve owned multiple properties during the same period, the form helps determine which property is eligible for the exemption.

Step 4: Include the Forms with Your Tax Return

Attach Schedule 3 and Form T2091 (IND) to your T1 General Income Tax and Benefit Return. Ensure all information is accurate and complete to avoid delays or penalties.

What Is the Principal Residence Exemption (PRE)?

The principal residence exemption (PRE) allows Canadian taxpayers to avoid paying capital gains tax on the sale of their principal residence. This exemption applies to the entire capital gain if the property was your principal residence for every year you owned it.

Example 1: Full Exemption

  • Purchase Price: $300,000
  • Sale Price: $500,000
  • Capital Gain: $200,000

If the property was your principal residence for all years of ownership, the $200,000 gain is fully exempt from capital gains tax.

Example 2: Partial Exemption
If the property was not your principal residence for one or more years, the exemption is prorated based on the number of years it was designated as such.

  • Years Owned: 10
  • Years Designated as Principal Residence: 8
  • Capital Gain: $200,000

Exempt Portion: 8\10×200,000=160,000
Taxable Portion: 200,000−160,000=40,000

The taxable portion ($40,000) must be reported as a capital gain.

Common Scenarios for Reporting the Sale of a Principal Residence

Scenario 1: Selling a Fully Exempt Principal Residence

John bought a house in 2010 for $250,000 and sold it in 2023 for $450,000. Since John lived in the house for the entire period and designated it as his principal residence, the $200,000 capital gain is fully exempt from tax.

John reports the sale on Schedule 3 and completes Form T2091 (IND) to confirm the exemption.

Scenario 2: Property Used for Rental Income

Sarah purchased a house in 2015 and rented out the basement while living in the upper floors. In 2023, she sold the house, realizing a $300,000 capital gain. Since part of the property was used to generate rental income, Sarah must allocate the capital gain between personal use and rental use.

Scenario 3: Changing Principal Residence

Emma owns two properties: a condo and a cottage. From 2010 to 2018, she lived in the condo, but starting in 2019, she moved to the cottage. When Emma sells both properties, she must decide which one to designate as her principal residence for each year.

What Happens If You Don’t Report the Sale?

Failing to report the sale of your principal residence can result in significant penalties, even if no tax is owing. The CRA can impose a fine of $100 per month (up to $8,000) for failing to report the sale on time.

If you realize you’ve made an error or failed to report the sale, you can correct it by filing an adjusted tax return or submitting a request under the CRA’s Voluntary Disclosures Program (VDP).

Key Points to Remember

  1. Always report the sale of your principal residence on your tax return, even if it’s exempt from capital gains tax.
  2. Use Schedule 3 and Form T2091 (IND) to provide the necessary information to the CRA.
  3. Keep accurate records of your property transactions, including purchase and sale agreements.
  4. If you own multiple properties, carefully evaluate which one to designate as your principal residence for tax purposes.
  5. Avoid penalties by filing your return accurately and on time.

Conclusion

Reporting the sale of your principal residence is an essential step in complying with CRA regulations, even when no tax is owed. By understanding the reporting requirements and the principal residence exemption, you can avoid penalties and ensure a smooth tax filing process.

For expert assistance with reporting the sale of your principal residence or navigating complex tax scenarios, contact BOMCAS Canada at info@bomcas.ca or visit BOMCAS Canada. Let our team of professionals guide you through every step of the process and maximize your tax benefits.