A taxpayer and spouse may only designate one principal residence between them for each
tax year after 1981. For years prior to 1982, each
individual taxpayer can designate one principal residence, so if a
couple has owned both a primary home and a cottage for decades, the
principal residence exemption is available for both homes for the
years prior to 1982.
The increase in value of the
home from time of purchase is used to calculate the gain before deducting the
principal residence exemption. If a home has been owned since before
1972, only the increase in value since December 31, 1971 is used to calculate
the gain before deducting the principal residence exemption.
Canada Revenue Agency (CRA) usually considers that if there is more
than 1/2 hectare (1.25 acres) of property, only 1/2 hectare of the land can
be considered part of the principal residence, and there would be a capital
gain on the excess when the property is sold, even if the rest is the
principal residence. However, they also consider whether the
property is subdividable. Thus, if the property is 2 hectares, and is
not subdividable, they may consider the whole amount of the land to be part
of the principal residence.
If your home was not your principal
residence for the whole time that you owned it, you will have to
report the sale on your tax return, and calculate the principal
residence exemption to deduct from your capital gain.
The principal residence exemption calculation is:
(# of years home is principal residence +
1) x capital gain
# of years home is owned
The extra year in the top of the equation means
that when a person moves, both the old home and the new home will be
treated as a principal residence in the year of the move, even though
only one of them can actually be designated as such for that year.
Example of principal
The exemption amount is (14 + 1)/20 x 100,000 = $75,000, leaving a
capital gain of $25,000, and a taxable capital gain (50%) of $12,500.
If you have both a home and a cottage,
and sell one of them at a profit, you must make a decision as to whether to
designate the sold property as your principal residence for some or all of the
years it was owned. If you sell a cottage that you have owned for 10
years, you could designate the cottage as your principal residence for the
entire 10 years in order to eliminate capital gains tax, as long as you have
not designated any other property as your principal residence during that
This would mean that when you sell your home you will likely be paying
capital gains tax, as you cannot also designate the home as your principal
residence for those 10 years. If you have a significant gain so far on
your home but a small gain on the sale of the cottage, it might be best to
save the exemption for the sale of your home.
If you had sold a previous home at a gain say 4 years prior to selling the
cottage, and did not declare the sale for capital gains purposes, then you can
only claim the cottage as your principal residence for a maximum of 4
years. This is because you were deemed to have claimed the principal
residence exemption when you sold the previous home.