Income Tax Act s. 40(2)(b)
When a principal residence is sold, the gain is not
taxable if it has been the person's principal residence for the
whole time it has been owned. This is because the
principal residence exemption eliminates the capital gain.
In this case, there is no need to report the sale on your tax return.
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.
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.
