Potential Taxes When Selling Your Primary Residence

The biggest change to the Principal Residence Exemption was implement in January 2023. The Federal “anti flipping law” new tax law will disallow the use of the principal residence exemption to shelter the capital gain realized on the sale of your home if you’ve owned it for less than 12 months. This legislation is designed to “reduce speculative demand in the market place and help to cool excessive price growth.” Should the sale be properly classified as an adventure in the nature of trade and, therefore, taxable one of two ways: as business income or as capital property.

Criteria of a Principal Residence
A number of criteria must be met for a residence to qualify as a principal residence.

1. The property must be:

(a) a housing unit which includes either a house, an apartment in a duplex, apartment building, a condominium, a cottage, a mobile home, a trailer or a houseboat;
(b) a leasehold interest in a housing unit; or
(c) a share of the capital stock of a cooperative housing corporation – formed and operated for the purpose of providing its members with housing.

2. The property must be owned solely, or jointly with another person (as joint tenants or tenants in common).

3. The residence must be ordinarily inhabited in the year by the taxpayer, the taxpayer’s spouse or former spouse, or a child. If the residence was inhabited only by the child, the child must have been wholly dependent on the taxpayer for support and must have been:

(a) under 21 years of age;
(b) 21 years of age or over and dependent on the taxpayer by reason of mental or physical infirmity; or
(c) 21 years of age or over and in full-time attendance at a school or a university.

4. For a taxation year after 1981, the property must have been designated by the taxpayer to be the taxpayer’s principal residence for that year. No other such residence may have been so designated for that year by:

(a) the taxpayer;
(b) a person who was throughout the year the taxpayer’s spouse; or
(c) a child of the taxpayer (other than a child who was during the year a married person or who was 18 years of age or over).

This restriction does not apply to a spouse who was living apart from the taxpayer pursuant to a judicial separation or written agreement.
Prior to 1982, the taxpayer need only meet requirements (a) to (c). From 1982 on, where the taxpayer was, during the year, neither a married person nor a person 18 years of age or over, no other residence may be designated as a principal residence by:

(a) the taxpayer’s mother or father; or
(b) the taxpayer’s brother or sister, if not married or 18 years of age or over.

OWNERSHIP OF PROPERTY

The designation of a residence as a principal residence can only be made where there is sole or joint ownership. Where a residence is owned jointly by a taxpayer and the taxpayer’s spouse and a capital gain is realized on the sale of that residence, both the taxpayer and the spouse will have a gain on the sale of the property. For taxation years after 1981, the Income Tax Act 30 provides that there may only be one principal residence per family unit. Consequently, where a property is jointly owned by the taxpayer and the taxpayer’s spouse, and the taxpayer has designated the jointly-owned property as the principal residence, it would be prudent for the spouse to make the same designation. Prior to 1982, both the taxpayer and the taxpayer’s spouse were entitled to designate a principal residence, be they jointly owned or separately owned.

MEANING OF “ORDINARILY INHABITED”

Whether a residence was ordinarily inhabited during a taxation year will be determined on the facts of each case. Where the residence has been occupied for only a short period of time during a taxation year (such as a vacation home or a house which was sold early or bought late in a taxation year), it is CRA’s view that the taxpayer ordinarily inhabited that residence in the year, provided that the principal reason for owning the property was not for the purpose of gaining or producing income from the property. Where a taxpayer receives incidental rental income from a seasonal residence, the property is not considered to be owned for the purpose of gaining or producing income.

DESIGNATING THE PRINCIPAL RESIDENCE

Although a taxpayer is required to designate the principal residence in order to take the principal residence exemption, CRA’s position is that the designation need not be filed unless a taxable capital gain on the sale of a principal residence occurs after deducting the exempt portion of the capital gain. Where a taxpayer chooses to make the designation, it may be made on form T2091 which is available at any CRA office.

LAND SURROUNDING THE PRINCIPAL RESIDENCE

The land under the principal residence and the adjoining land that contributes to a taxpayer’s use and enjoyment of the residence qualifies as part of the principal residence. CRA’s view is that, generally, no proof of use and enjoyment is required for one-half hectare of land or less (including the land under the principal residence).

Where the total land area is greater than one-half hectare, the excess is not generally considered to be part of the principal residence unless the taxpayer can demonstrate that it was necessary for the use of the residence. The excess land must be necessary for the building to function properly as a principal residence as opposed to being simply “desirable.” CRA provides examples

of some situations where, in its view, land in excess of one-half hectare could be considered to be “necessary.” They are:

• where municipal or provincial laws require residential lots to be in excess of one-half hectare and, in some cases, where severance restrictions apply;

• where the size or character of a housing unit, together with its location on the lot, make such excess land essential to its use and enjoyment as a residence; or

• where the location of a housing unit requires such excess land in order to provide the taxpayer with access to and from public roads.
  

An evaluation of whether land is necessary to the use and enjoyment of a housing unit as a residence is not an all or nothing analysis. In some cases, it may be determined that only part of the excess land was necessary, with the result that some portion of the gain on the sale of the excess land will be taxable.