Principal Residence Exemption | What You Need To Know!

In this article, we'll cover off some of the nuances of that and ensure that if you are thinking about making use of the principle rents exemption that you are doing it properly. So the first thing you want to keep in mind is that the exemption needs to be reported.The principal residence exemption allows you to sell a property and not pay any tax on it, the capital gain that you would normally accrue from the sale of that property doesn't apply. Since 2016, the CRA has required that this exemption be reported on your personal income tax return. So you want to make sure that you're working with your accountant to ensure that that is done.The second criteria is that residence exemption is only going to apply to a property that you actually live in. So a property the CRA uses the term 'ordinarily inhabited.' So while there's not a specific set number of days that the CRA sets out that you are actually resident inside of the home, it is the CRA if they assess and looking deeper into whether the exemption actually applies or not. They're going to look at things like the length, the amount of time that you are in the property, they're going to look at your sources of income, whether the real estate sale was done as a part of another series of transactions, so such as a like a real estate flipping venture. So you want to ensure that that the narrative that is behind the sale of the property is compliant with what the CRA understands a principal residence exemption to apply.The third piece is that if you are using your property to generate income, that is like through a long term or short term rental, in general, it's not going to qualify for the principal residence exemption. So that is a different type of use of property termed an investment property. And if it is, if it's an investment property, then it just doesn't qualify for it. However, there are some exceptions and principal residence can still meet those criteria if you are renting out for a very short period of time. So perhaps you have a summer cottage that you're just renting out for a couple of weeks a year on Airbnb or another short-term rental site. That generally will be okay. But you're going to want to check with your tax advisor before you confirm that.The last point that I want to bring up is that it's the principal residence exemption only applies on 1.2 acres of land. So, if you have a large property, then it is not going to qualify for the principal residence exemption rather, only a portion of it will the 1.2 acres. There are some exceptions that permit the residence exemption to expand beyond the 1.2 acres, but that is subject to very specific requirements that the CRA has.Finally, if you do not report the principal residence exemption, then you may be subject to fines. So the CRA may assess up to $100 per month that the residence exemption is not reported. And they may actually even refuse the exemption itself which would result in the taxpayer owing the entire amount due on the capital gain.If you have any questions about the principal residence exemption, please don't hesitate to reach out or speak with your accountant or another qualified tax advisor.