For the year in which you sell your home, technically speaking the law requires you to file Form T2091 (Designation of a Property as a Principal Residence) with your tax return in order to designate the years that are being used in the principal residence calculation. However, Canada Revenue Agency (CRA) has stated that you do not need to complete this form unless there is a taxable capital gain after using the principal residence exemption.
When a principal residence is sold, the gain is not taxable if it has been your 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. If the capital gain is only partially eliminated, then the sale must be reported.
TAX TIP To designate your property as the principal residence, it does not have to be the place where you lived all the time. You and your spouse or common law partner may only jointly designate one principal residence for each tax year after 1981. The property will qualify as a principal residence if you, your spouse or common-law partner, or any of your children lived in it at some time during the year. However, if it is rented out then your situation may drastically change. To determine the best tax treatment for your real estate properties, please contact us now.
If You Own Two Houses
For those situations where you own two houses or condominiums at the same time, there is an assumption as to which years were sheltered by the principal residence exemption based on the amount shown on your tax return. For example, if you owned two houses at the same time and sold one house in Year 1 and the second house in Year 4, if the gain in Year 1 was not reported on your tax return, then it would be assumed that the second house was not your principal residence during the years when the first house was owned. Therefore you may have income tax to pay.
TAX TIP Where the principal residence exemption fully eliminates a capital gain, a designation of the property is considered to have been made for the years necessary to eliminate the gain, but please note that CRA could technically challenge you as to whether the Form T2091 has been “filed”. Please contact us now for professional assistance regarding sales of your real estate properties.
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