You don’t pay taxes on your house when you sell it, unless you do certain things to it like rent it out, or if you own multiple homes. This article will describe the rules around the taxes on your house, and the key definitions and criteria. It will also describe how taxes may arise, in which circumstances, and how to calculate it. As a Canadian who owns a house, you should take the time to understand how the rules surrounding the taxes on your house work!
The Basics – Taxes on Your House
If you sell anything you own, you typically have to pay tax on the capital gain on the sale. A capital gain is the difference between the selling price and the cost price. In most circumstances, the tax on capital gains does not apply to the sale of your house! This is because of the ‘principle residence exemption’. The ‘exemption’, which although may have a complicated formula, essentially states that a taxpayer with one house (i.e. their ‘principal’ or only residence) will not pay tax on the capital gain when it is sold.
The official rules state that a house is a principal residence if it was owned and ordinarily inhabited by a in the year. If a gain arises on the sale of a house, one can use a provision in the Income Tax Act, the principal residence exemption, to reduce if not completely eliminate the gain on the sale of this principal residence. However, only one principal residence can be designated under such an exemption per year.
Details of the rules
In order to have a house designated as a ‘principal residence’, you must designate it for the year, and no other property may have been designated by you for the year. To complete this designation, you must complete and file a form T2091(IND) “Designation of a Property as a Principal Residence by an Individual” when you file the tax return for the year in which you sold the house.
The formula, although complicated, should still be noted by house-owners! The principal residence exemption takes into account the following:
A – the number of years you have owned the house
B – 1 + the number of years you have designated the property as a principal residence
C – capital gain on the house (selling price minus the cost price)
Total gain = C x (B / A)
There are certain circumstances where tax may result on your house. If you rent a portion of your home out, then you have converted your principal residence into an ‘income-producing property’. At the time of this conversion, your house is deemed to have been sold at the fair market value at the time. There will be no tax to pay at the time, however, there may be tax to pay in the future, depending on what you do. Below is a ‘timeline’ of events that can change things for you.
t1 – when house is rented out, a deemed sale occurs – no tax on capital gain yet because the house had been a principal residence before this point, and then,
t2 – when house is no longer rented out, a deemed sale occurs again – a tax on capital gain will only occur to the extent the house increased in value from t1 to t2
t3 – when the house is sold right after being rented, an actual sale has occurred – a tax on capital gain will occur to the extent the house increased in value from t1 to t3
Keep in mind that the ‘deemed disposition’ are rules according to the Income Tax Act. However, the CRA’s administrative policy for these things can treat things differently. In other words, the CRA’s practice is to no apply the deemed disposition rules if all of the following rules are met:
a) the income-producing is secondary to the residence (not the main use of the house),
b) there is no structural change to the house, and
c) no depreciation is claimed on the house.
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.