Taxes When You Sell a Home in Canada

When you sell your home in Canada – whether it’s your principal residence, second home or an investment property – you need to know about capital gains and the taxes you’ll have to pay. For your principal residence, you could qualify for a Principal Residence Exemption that allows exempts the transaction from any capital gain taxes. For a second home or cottage, you may be able to avoid capital gains tax if you declare it as your principal residence. The process is complicated, however, and has many rules. For most other situations, a capital gains tax will apply.

Capital gains

A capital gain occurs when you sell an investment for more than the price you paid for it. The investment could be shares in a mutual fund, stocks or real estate. If you make a loss on the sale, this is called a capital loss. You can use the capital loss to offset any capital gains you have in the current year, the three preceding years or that you may have in future years. Please check the Canada Revenue Agency (CRA) website for current rules for this [2].

Capital gains tax

In Canada, capital gains are taxed as income. 50% of your capital gains will be added to your income and taxed accordingly. Subsequently, the amount of tax you pay for your capital gains depends on how much you make and your other income [1]. Capital gains tax on investments in the United States is handled differently with differentiation between short-term and long-term investments. [13] In contrast, Canadians pay the same capital gains taxes regardless of how long they’ve held an investment.

Principal residence capital gains tax exemption

The Principal Residence Exemption (PRE) allows you to sell your principal residence without paying any capital gains tax. However, you will not be able to claim any capital losses on your principal residence either. If you rented out part of your home, you can claim the PRE for the part of the home that you used for you and your family’s own living space.

What qualifies as a principal residence?

Your principal residence is where you and your family normally live in Canada during the year. You must own or jointly own the home. However, in some cases, a vacation property that you own and only you and close relatives use may be considered as your principal residence as long as you don’t earn any rental income from it. You don’t even have to live in the residence for the whole year. But you can only claim one home as a principal residence in any calendar year for your family unit (you, your partner and any children under 18 years of age). [1,2,3,4]

Your principal residence can be any number of different property types according to the Canada Revenue Agency. It can be a house, a duplex, a condo, a cottage, a cabin, a mobile home, a trailer or a houseboat. You can generally only have half a hectare (1.25 acres) of land on which your residence sits. You can ask for an exemption to this rule if you can prove that the extra land is solely for your enjoyment and not for any business [5].

What to do after selling your principal residence

New rules came into being in 2016 that require you to report the sale of your principal residence on your income tax form. Since 2017, sellers have had to report the sale on Schedule 3, Capital Gains (or Losses) as well as  Form T2091(IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust). If the home you sell was always your principal property or for all years except the year in which you sell it, you can just complete page 1 of Form T2091. But always check the Canadian Revenue Agency website for the exact requirements (3,4).

Second homes and investment properties.

When selling a property that is not a principal residence, including a second home or investment property, you will have to pay capital gains tax. There are a few ways to reduce your capital gains tax.

You may be able to designate your second home as your principal residence. You will then qualify for the principal residence tax exemption and won’t have to pay capital gains tax. If you rent out your second home, however, it cannot qualify as a principal residence. It’s more complicated if you’ve only rented it out for part of the time you’ve held it. You may be able to claim the property as your principal residence for the time when you were using it. If so, you will not have to pay capital gains tax on the appreciation during that time. The CRA considers the total appreciation to be evenly spread over the time you have held the property. 

For example, let’s say you buy a property for $500,000 and you sell it for $1 million 10 years later. For five years of that time, you’ve used the property as a personal second home and principal residence. For the other five years, it was rented out. The total capital gains would be $500,000, but you could potentially pay capital gains tax on only $250,000 (or half of $500,000).

Living abroad

If you live outside of Canada, your capital gains tax will depend on your residency status as well as your country of residence. If you are still a Canadian resident, you will be subject to Canadian capital gains tax unless otherwise exempted by the principal residence tax exemption. If you are not a Canadian resident, then your capital gains tax will depend on your local taxes as well as the existence of any tax treaty with Canada. These are general guidelines, and to find out more information about your specific tax situation and residency status you should consult a tax lawyer specializing in international tax accounting. 

Summary

In general, all capital assets, including real estate, are subject to capital gains tax. Your property could be exempt from capital gains tax, however, if it is your principal residence and applies underneath the Principal Residence Exemption. Even if you have more than one property, you may be eligible for all or part of the PRE depending on how you designate your principal residence. 

For more information, consult a real estate agent. If you live abroad, consult a tax lawyer or a specialized accountant. As you’ve seen, it’s complicated and you don’t want to pay capital gains tax if you don’t have to.

References

  1. Capital gains tax – Canada 2019. Wealth Simple.
  2. Capital losses and deductions. Government of Canada.
  3. Selling your home? What the new tax rules mean for you. Sun Life.
  4. What can I claim when selling a home?  intuit turbotax.
  5. Selling your home tax-free may be more complex than you think. The Globe and Mail.
  6. Tax implications of owning a cottage or second home. Taxtips.
  7. Disposing of your principal residence. Government of Canada.
  8. How to tell the taxman you’re selling your home. MoneySense.
  9. Selling Your Canadian principal residence. intuit turbotax.
  10. Selling your rental property. Government of Canada.
  11. Determining your residency status. Government of Canada.
  12. Procedures concerning the disposition of taxable Canadian property by non‑residents of Canada – Section 116. Government of Canada.
  13. Topic No. 409 Capital Gains and Losses. IRS.
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