principal residence exemption calculation formula
What’s new on your 2016 tax return: Sale of a principal residenceMarch 23, 2017
By Sheryl Smolkin
For many Canadians, the family home is the most valuable asset they own and an important factor when they are planning their retirement. When you sell your principal residence, any increase in value is not subject to capital gains tax. However, if you sold your principal residence in the last year, there is a new form you will need to complete for the first time when you file your 2016 income tax return.
Your principal residence can be any of the following types of housing units:
- A house
- A cottage
- A condominium
- An apartment in an apartment building
- An apartment in a duplex, or
- A trailer, mobile home, or houseboat.
For one of the above to qualify as a principal residence you must have owned it alone or jointly with another person. In addition, you, your current or former spouse or common-law partner, or any of your children must have lived in the home at some time during the year.
You are only allowed to designate one home as your principal residence for a particular year. If you are unable to designate your home as your principal residence for all the years you owned it, a portion of any gain on sale may be subject to tax as a capital gain. The portion of the gain subject to tax is based on a formula that takes into account the number of years you owned the home and the number of years it was designated as your principal residence.
The principal residence exemption calculation formula is:
The extra year in the top of the equation (the “one-plus rule”) 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. However, for dispositions occurring after October 3, 2016, the “one-plus” factor applies only where the taxpayer is resident in Canada during the year in which they acquire the property.
In years prior to 2016, there was no need to report the sale on your tax return if the entire gain was eliminated. However, on October 3, 2016 the federal government announced that, starting with the 2016 tax year, the sale of a principal residence must be reported on Schedule 3 of the tax return in order to claim the principal residence exemption. This change applies also for deemed dispositions, such as a deemed disposition due to change in use of the property.
The purpose for the new reporting requirement is two-fold. The federal government wants to ensure that Canadian residents only claim the capital gains exemption for principal residences in appropriate circumstances. In addition, under the new rules, foreign buyers who were not residents at the time a home was bought will no longer be able to claim a principal residence exemption.
There are two other major changes to the Income Tax Act (ITA) regarding the reporting of the disposition of a principal residence:
- Canada Revenue Agency (CRA) can, according to new ITA s. 152(4)(b.3), reassess a taxpayer outside of the normal reassessment period, if the taxpayer does not report a disposition. Normally for individuals the reassessment period is three years from the date of the initial notice of assessment, with some exceptions.
- If the disposition of the principal residence is not reported on the tax return as required, a late-filing penalty can be imposed @ $100 per month x the number of months late, to a maximum of $8,000. New ITA s. 220(3.21) is added to this effect.
For a more in depth assessment of how changes to the principal residence exemption may impact you, contact your accountant or other tax advisor.