Principal Residence Exemption: What Every Canadian Business Owner Needs to Know

Principal Residence Exemption: What Every Canadian Business Owner Needs to Know

DISCLAIMER

This information is intended for business owners in Canada and serves as general guidance only. Always consult with a qualified advisor before making any legal decision. 

In this article, we’ll cover the following topics:

• What are the qualifications for the principal residence tax exemption?

  • Residential properties

  • Sole or joint ownership properties

  • “Ordinarily inhabit”

  • Designation as principal residence

  • Limitations of the PRE

If you want to sell a property but don’t want to pay any tax on the sale, one route to take is the principal residence exemption (PRE). Homes that qualify for the PRE do not attract capital gains tax when sold.

There are four ways to qualify for the PRE:

• The property is considered to be “ordinarily inhabited”

• The property is designated as your principal residence

• The property is residential

• The property is solely owned by you or jointly owned by you and someone else

The last two qualifications are easy enough to understand, so let’s focus on the first two. 

“Ordinarily inhabited”

Even if you only use the property a few times per year (perhaps it’s a vacation house, ski chalet, lake cabin, etc.) then it can still be considered “ordinarily inhabited” – a legal term that translates as somewhere in between “this is my permanent residence,” and “I stay here five days per year, the other 360 days are for Airbnb guests.”

With few exceptions, the CRA considers income-generating properties to be investment properties, not primary places of residence. One exception would be if you’re renting it out for a very short period of time, i.e. a few weeks. But remember, the CRA does not provide any sort of specific benchmark, so it’s best to work with your tax advisor to ensure compliance.

Designation as principal residence

Designating your principal residence requires you to report the proper information to the government using the following forms - chat with your tax advisor on how to complete them.

• On your T1 tax return, the second page of Schedule 3 (titled “Capital Gains or Losses”)

• Form T2091: Designation of a Property as a Principal Residence by an Individual

If you do not submit both of these forms, your principal residence will not qualify for the PRE.

Limitations of the PRE

In recent years, the CRA has stepped up its enforcement of the PRE, looking more closely for people who may be taking advantage of the system. For example, if you claim the PRE two years in a row, the CRA may challenge this election, as that gives them a good reason to believe you are flipping the property. 

Similarly, you may also attract the attention of the CRA if you claim the PRE while previously reporting gross rental income on the same property, as that makes it look like you’re renting the property (i.e. using it to generate income) not using it as your principal residence.

Lastly, the principal residence exemption currently only applies to 1.2 acres of land. For example, if your property is .5 acres, the entire property will qualify; if your property is 16 acres, only 1.2 acres will qualify and the remainder will be taxed unless you can prove that area beyond 1.2 acres was required for the enjoyment of the residence. There are some creative ways to expand the exemption beyond 1.2 acres, but the CRA’s requirements for doing so are very specific.

Want to learn more about principal residence exemptions? We’re here to guide you. Contact us today using the below form.