If you sell your home and it is designated as your principal residence, then you have the ability to claim the principal residence exemption (PRE) on the sale. The PRE is probably one of the most valuable tax breaks available to Canadian homeowners, as it provides them with an exemption from tax on the capital gain realized when the home is sold, provided that it has been designated as the principal residence. Unscrupulous individuals have been taking advantage of the PRE for tax evasion purposes, the Canada Revenue Agency (CRA) is working hard to close the loopholes.
In order to qualify your home as your principal residence for a particular tax year, 4 conditions must be met:
- You must own the property in your name or jointly with someone else.
- You or your spouse or kids must “ordinarily inhabit” the property.
- The property must be a home.
- You must declare the property as your principal residence.
It should be noted that a seasonal residence, such as a cottage, cabin, lake house or even ski chalet can be considered to be “ordinarily inhabited in the year” even if it is only used during vacation periods “provided that the main reason for owning the property is not to gain or produce income.”
The CRA has made recent changes in its reporting requirements regarding the sale of a principal residence. It must now be reported as on Schedule 3 of a tax return, and a form – T2091 (IND) Designation of a Property as a Principal Residence by an Individual.
The size of land that qualifies a principal residence is defined by the “half hectare” rule. This rule has been established by statute and limits the amount of land that qualifies for exemption to half a hectare, unless the homeowner can show that any excess land is “necessary for the use and enjoyment of the housing unit as a residence.”
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