As a general rule, the sale or disposition of any residential property in Canada triggers a capital gain, or, in an unlikely scenario, a capital loss. The capital gain is equal to the difference between the adjusted cost base (the amount for which the property was purchased) and the price at which it was sold. It is not necessary for the property to have actually been sold; it is enough for a tax rule or regulation to deem that a sale (disposition) took place to trigger a capital gain.
Fortunately, the Principal Residence Exemption ("PRE") can offset or even eliminate completely a capital gain, whether the property was sold or otherwise deemed to have been disposed of. The purpose of the PRE is to allow Canadian property owners to sell their properties and reinvest into the purchase of a new home on a tax-free basis. This exemption can be used for the property that the taxpayer designates as their "principal residence." A principal residence is defined as one that is "ordinarily inhabited" by the taxpayer. The meaning of "ordinarily inhabited" varies depending on the exact factual circumstances.
Filing Requirements and the T2091
In 2016, the government announced an administrative change with respect to reporting requirements for the sale of a principal residence. Prior to this, taxpayers were not required to report the sale of a home on their income tax if they were eligible for the full tax exemption. However, beginning in the 2016 taxation year, all taxpayers are required to report basic information (such as the date of acquisition, proceeds of disposition, and description of the property) on their income tax returns to claim the PRE. Form T2091 is used for this purpose and is included in the income tax return for the year of sale or disposition.
Not all homeowners will be eligible for the PRE. As with many rules under the Income Tax Act, there are exceptions to the exemption and conditions that must be satisfied.
Exceptions to the Principal Residence Exemption – Frequency of Sales
The 2022 Federal Budget brought in a new "Residential Property Flipping Rule" that pertains to 'house-flipping' – the act of purchasing and selling real property over a short period of time. Prior to this legislation, there were no rules regarding how often a person can buy, build, or sell real property. The "principal residence" designation was evaluated on a case-by-case basis and typically required the taxpayer to prove that they intended, at the time they acquired the property, to reside in it "permanently."
The new legislation, applicable to properties sold after January 1, 2023, stipulates various new tax consequences for frequent purchase-and-sale transactions of real properties. The consequences are twofold: first, a "flipper" is ineligible for the PRE, even if it would otherwise apply; and second, any profits realized on the sale of "flipped" residential properties are taxable as business income, not as capital gains. In most circumstances, this is a much more costly tax liability. The previous "informal 1-year" rule became a statute: residential properties held for less than 12 months will generally be considered "flipped" unless the sale is the result of a death, disability, new job, separation, or another exemplary life event.
Conclusion
In conclusion, while an owner may be exempt from tax on the sale or disposition of real property by utilizing the PRE, the eligibility to claim the full amount of the exemption is affected by (among other things) the ownership of more than one property and the frequency at which the properties are bought and disposed of. Taxpayers who have owned a property for less than a year, or who own multiple properties, should consider the implications of selling their home.
This blog was co-authored by law student Julia Ponedelnikova.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
