A principal residence is considered the primary residence, or main residence, that a person inhabits.
A principal residence can be any of these types of housing units:
The housing unit will qualify as a principal residence if you own the property alone or jointly with another person. Furthermore, one principal residence can be designated as long as an individual, couple, or family lives there most of the time.
You can have only one principal residence at a time. However, if you sell the principal residence and buy another, or move to another property that you own in the same year, you can use the plus one rule when calculating the principal residence exemption amount. The plus one rule allows you to claim the principal residence exemption for both properties for that year, even though you can only designate one property as your principal residence.
Suppose you were not a resident of Canada through any tax year during which you owned the designated property. In that case, the principal residence exemption may be reduced or eliminated based on how long you were not a resident.
What is the principal residence exemption?
The principal residence exemption may reduce or eliminate your capital gain. For example, if the property was solely a principal residence, you do not have to pay tax on the capital gain every year that you owned it. However, if the property was not your principal residence at any time when you owned it, you may have to report all, or part, of the capital gain.
What do you need to do to get the principal residence exemption?
First, you will need to report the sale of your principal residence and make the designation. You can do this by filling out the Schedule 3 form when you file your income tax. You also have to file Form T2091 (IND), Designation of a Property as a Principal Residence by an Individual (other than a personal Trust), which includes specific information such as the address of the property sold, the date the property was purchased, and the amount you sold it for. You can submit Form T2091 electronically or by paper
If you ticked box 1 at line 17900 of Schedule 3, you only need to complete the first page of this form. You do not need to report any gain amount on Schedule 3 for this property
What happens if you don't report the sale?
If you forget to report the sale of your principal residence or don't make the designation, you need to contact the person or organization who filed the taxes and amend your income tax the year you sell the principal residence. In certain circumstances, if you are late in designation, you may have to pay a penalty. Your principal residence offers you shelter from taxes as well! If you sell your principal residence, ensure that you know the exemption rules to lower your taxes on capital gain.
Posted on 01 Dec 2021