Sale of Principal Residence-Changes In Tax Rule, Disclosure And its Tax Treatment

Under the current rules of Income Tax in Canada, if you dispose of your principal residence, the capital gains that you earn is tax free. Your principal residence could be your detached, semi-detached home, town house, condominium, bungalow, trailer boat or any other mobile home where you ordinarily live. You can choose only one home as your principal residence per year. In case if you own more than one residential property as your residence, you will have to make your choice of principal residence per year.

In case of a married taxpayer, you and your spouse have to choose only one home as a principal residence.

Let us illustrate with the help of one example, you have bought your principal residence in the year 2005 and you lived there until tax year 2013 in which you buy another residential property and lived there for some time before you disposed off the second property in 2016.

Choosing your first residence as your Principal Residence for all the tax years:

Under the circumstances, you have a choice of either treating the first residential property (which was bought in the year 2005) as your principal residence for the tax year 2005 to 2016 and pay the capital gains tax on the second residential property that you disposed off

Or

Choosing your second residence as your Principal Residence for all the tax years:

Consider your second residential property (bought in 2013) as your principal residence and not pay any capital gains tax at the time of its disposition. However, it should be noted that your first residence will not be considered as principal residence for the years 2014, 2015 and 2016.The capital gains tax will be payable at the time of disposition of your first residence.

Change in the Tax Rules:

1)      Until now there is no requirement to disclose if you sale your principal residence during the year. Now, if you sale such a residence, it will have to be disclosed along with the exemption on Schedule 3. This applies after sale of your principal residence on or after October 02, 2016

2)      Also, you should note that if you use part of your principal residence for producing income e.g. when you rent out your basement or whole residence or when you use if to claim home office expenses, you may have to pay capital gains tax on the part of your home that was utilized for claim of home office expenses or income producing.

Disclaimer: Any discussion on this blog relating to tax matters is purely for educational purposes and not taking any specific actions based the general tax rules described therein. Your tax situation could be different and as a result there may be different tax strategies applicable in your case. We do not claim the tax situations described above to be exhaustive or conclusive. In case of any specific tax situations or problems, you are advised to seek professional advice.