Canadian residents who dispose of their family home and realize a gain may be eligible to claim an exemption when computing the tax on that gain. The exemption can eliminate all or part of the taxable capital gain, depending on the circumstances. This is known as the “principal residence exemption” (PRE) which has been a part of the Canadian tax system for many many years.
Individual taxpayers and certain trusts (subject to recent changes) can claim the PRE. Other taxpayers, corporations for instance, cannot claim the PRE.
To qualify for the PRE, an individual must own the property and that individual or their spouse or child must “ordinarily inhabit” it in each year for which the exemption is claimed. This does not require spending all of your time at the residence. Seasonal cottages, for example, can qualify for the PRE. The PRE is automatically confined to the land under the house and up to a half hectare (or 1.2 acres) around it. If an individual wants to claim the PRE on more than a half hectare of land, that individual must show that the excess is essential to the use and enjoyment of the house as a residence.
A personal trust may claim the exemption on property it owns where a specified beneficiary of the trust “ordinarily inhabited” the house.
Recent Changes to the PRE
Until recently, individuals were not required to report the disposition of their family home to the CRA if the entire gain was exempt by the PRE. The CRA now requires that taxpayers report the sale on their tax return for the year in which the sale occurred.
Under proposed changes to the law, the CRA can assess a late-filing penalty for reporting the sale of the principal residence late or not at all. In some cases, the CRA may assess a gross negligence penalty as well. The period in which the CRA can reassess a taxpayer for an unreported sale is extended indefinitely (the usual limitation is three years, with some exceptions).
Trusts were always required to report the disposition of a PRE on their T3 Trust Income Tax and Information Return. Trusts reported the disposition on their return by including Form T1079 (“Designation of a Property as a Principal Residence by a Personal Trust”).
Beginning in 2016, individual taxpayers must report the sale of the principal residence on Schedule 3 of their T1 personal income tax return. The information required to be reported includes:
- The address of the property;
- The date it was acquired; and
- The proceeds of disposition.
If a taxpayer seeks to claim the PRE for only certain years the property was owned, she/he must complete Form T2091 “Designation of a Property as a Principal Residence by an Individual (Other than Personal Trust).” In that case, Schedule 3 must be completed as well.
For years after 2016, the types of trusts that are eligible to claim the PRE are limited to:
- Alter ego trusts, joint spousal or common-law partner trusts, spousal or common-law partner trusts;
- Qualified disability trusts; and
- Trusts for minor children of a deceased parent.