If you are selling a house for the first time or it’s been a long time since you’ve sold property, don't forget to review Canadian tax rules so you know exactly what to expect when filing your taxes. Here are a few common questions:
- Do I have to pay capital gains taxes when I sell a house?
- What are the new tax rules when selling a house?
- How does the principal residence exemption (PRE) work?
Selling a home is exciting, stressful, and a lot of work! The last thing you need is a major surprise at tax time. Fortunately, the changes to Canadian tax rules for property sales are fairly simple and mainly affect real estate investors and house-flippers.
When do you pay capital gains tax on a house sale?
If you sell a property that is not designated as your principal residence, you need to pay tax on half of any capital gains from the sale. You don't have to pay capital gains tax if you sell your principal residence. This isn’t new. What's changed (since 2016) is that you now have to report the sale of your property — even if it's your principal residence — on your income tax return.
As long as you are a Canadian resident (and meet other CRA requirements), you still don’t have to pay capital gains taxes, but you’ll need to include some information about the sale of your home on your tax return.
Summary of new tax rules for principal residences
The changes are mainly to do with reporting requirements and how non-residents calculate the length of time they’ve owned their principal residence. In theory, the changes were meant to close a ‘loophole’ that previously allowed foreign investors and house-flippers to avoid paying capital gains taxes on the sale of residential real estate by claiming properties as their principal residences.
The additional reporting requirements allow the CRA to monitor compliance and look for trends—particularly for anyone who is frequently buying and selling homes.
So what do you need to report on your tax return if you sell your home? You will need to report the sale and designate the property on Schedule 3 and form T2091IND of your tax return. Some details will include: the year you bought your principal residence, its address, and the sale price.
If you don’t report the sale of your principal residence on your return for the tax year it was sold, you may be liable for capital gains on the sale, plus penalties and interest. You can ask the CRA to amend your return and designate the property as your principal residence, but even if they do accept the change, a penalty—$100 per month for each month you’re late, to a maximum of $8,000—may still apply.
How does a property qualify as a principal residence?
The property doesn’t need to be a house—it can be a condo, cottage, trailer, or even a houseboat—but it does need to meet all of the following four conditions:
- It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation
- You own the property alone or jointly with another person
- You, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year
- You designate the property as your principal residence
Also, you don’t need to live there for the whole year. Even short periods of time are sufficient. Only one dwelling can be a principal residence at a time and you must designate it as such.
When in doubt, enlisting the help of a qualified tax professional is your best bet for advice on how to file your tax return properly and avoid any costly errors.
With over 15 years of experience in Edmonton real estate, Wally is a trusted expert who has helped thousands of clients navigate the home selling process. Call/Text 780.238.7384 or email Wally today for a free consultation.