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Principal Residence Exemption

Most countries provide tax breaks for individuals, either to offset costs or to incentivize certain behaviours. For most Canadians, the biggest personal tax break provided by the Income Tax Act is the principal residence exemption. The principal residence exemption is a deduction that can reduce the capital gain from the sale or a residential unit to zero. This tax break is meant to promote home ownership and to assist individuals in building wealth.

The principal residence exemption formula determines how much of the gain realized on the sale of a home can be deducted.

Not all residential units meet the definition of a principal residence.

This article will first set out the definition of principal residence and then discuss the formula used by the CRA to determine what portion of a gain is exempt from taxation.

Generally, a principal residence is defined as a housing unit that is owned by an individual and that individual ordinarily inhabited the unit in the year (or the unit was ordinarily inhabited in that year by that individual’s current or former spouse, current or former common-law partner, or child). However, there are rules that can result, for any particular tax year, in a housing unit NOT being an individual’s principal residence. The most relevant limitation is that the individual fails to report the property as his or her principal residence for that year. No other property can be reported as a principal residence in the same year as another property. Some relief is provided where the taxpayer or the taxpayer’s spouse or common-law partner has to move for work.

There are special rules for trusts that are not discussed here.

The principal residence exemption formula takes into account four variables. The first is the gain on the sale of a housing unit. The second variable provides two alternatives depending on whether or not the taxpayer was a resident of Canada in the year that the property was acquired. The third is the number of years that the property was owned by the individual. And, the fourth is a variable that corrects for the difference in capital gains inclusion rates over the year and is only a concern for persons who bought the property before February 23, 1994. In short, the formula pro-rates the gain on the property from the date of acquisition to the date of disposition, and allows a taxpayer to deduct a portion of that gain based on the number of years that the property was the principal residence of the individual.

Where a taxpayer is not a resident of Canada during the year in which the property was acquired, then only the years that the property was the taxpayer’s principal residence AND the taxpayer was a resident of Canada qualify for the pro-ration. This limits the availability of the principal residence exemption to Canadian residents and denies the exemption to non-residents. Remember, that as with all things tax, the concern here is tax residence and not residence for immigration purposes.

NOTE: Articles are for general information only and do not constitute tax advice nor can they be relied upon. Call Faris CPA for assistance.

pro-tip

Pro Tip

ACCESSING THE SMALL BUSINESS DEDUCTION IN YOUR BUSINESS

The Small Business Deduction gives businesses a tax deduction on the first $500,000 of income. This saves an eligible corporation around up to $50,000 in income taxes. There are a number of conditions that have to be met to be eligible for this deduction.

I was referred to Mr. Faris by another professional who recommended him to deal with my multiple years of outstanding corporate and tax returns. I interviewed Sam and was impressed in his confidence and transparency. He did not promise the moon just to get my business. Sam was able to file all returns under the voluntary disclosure program. After completing filling all tax returns, I realized the amount of money he saved me. I enjoyed very much working with him. He ensured that the work progress flow smoothly without any complications. He took to consideration the emotional stress factor and he was available to speak with me even beyond business hours just to make me more calm and to make me feel that he is on top of the matter and it will be resolved to my satisfaction. Indeed, this is what happened. The matter was resolved to my satisfaction and CRA concluded that the returns which Sam filed are reasonable and there is no need to further audit me nor my company. In summary, Sam is a life saver. He saved me and saved my family and now I am in the right track where all my tax filing obligations are met and I don’t owe any taxes. So grateful to Sam and his dedication while working on my file.
Response from the owner:Raj Thank you for the positive Google review. We are happy that you are satisfied with our services. Voluntary disclosure program is one of our specialties and we have dealt with many complex cases too. We get referrals from other professionals as we have been in the business of fighting CRA many years and we have countless success stories that many professionals are aware of. Please do contact us if you require further help in the future.
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Response from the owner:Dear Tanya Thank you for the 5 stars Google review and your kind words. We strive to provide the best customer service and make our clients relax and calm during the process. The cases we are taking are very sensitive so providing quality work to the CRA is extremely important so just to avoid any escalation and to make sure that our package is accepted from the first round. We will remain at your disposal anytime you require our services. Sam Faris
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Response from the owner:Many thanks for the positive review.
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Response from the owner:Many thanks.
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Response from the owner:Thank you Paul for your positive feedback and we are glad we met your expectations.
I had an amazing experience working with Faris CPA for my CRA needs. They really know the CRA processes and made everything so easy. They were super professional, always ready to answer my questions, and made sure everything was done right. I couldn't have asked for better help. Highly recommend their services for anyone dealing with the CRA! -Sara
Response from the owner:Thank you Sara for the 5 stars review.