If you sold (or are considered to have sold) your home during the year, you might have realized a capital gain or profit. Usually you don’t have to pay tax on any capital gains from the sale of your home if the property was your principal residence for every year you owned it (known as principal residence exemption). However, you’ll need to designate your home as your principal residence to claim the principal residence exemption on form T2091(IND): Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust), when you file your tax return.
Note: The Canada Revenue Agency (CRA) states even if you didn’t actually sell your principal residence, you might have a deemed disposition which must be reported. A deemed disposition is when you are considered to have disposed of (sold) property, even though you didn’t actually sell it. For example, a deemed disposition will occur when you change how you use your principal residence, such as if you change all or part of your principal residence to a rental or business operation. Refer to the Changes in use section below for more information.
If the property was your principal residence for only some of the years or wasn’t your principal residence at all, you will have to pay tax on the gains from the sale. You'll need to report your capital gains on Schedule 3 (and Schedule G, if you’re a Québec resident) in H&R Block’s tax software. Schedule 3 and Schedule G are combined in the software and can be found under the PENSION PLANS AND INVESTMENTS icon on the PREPARE tab.
You can only designate one property as your principal residence for any specific year. However, if you sold your principal residence and bought another (or moved to another property that you own) in the same year, you might be able to claim the principal residence exemption for both properties that year (known as the “plus one” rule).
Note: Only one residence per year can be designated as the principal residence between spouses. If you and your spouse own your home and had a capital gain from its sale, both of you will need to report the gains on your tax return and split it based on your investment in the property. For example, if you and your spouse each own 50% of the house, you would split the gains 50 – 50 on your return.
Did you know? Since your home is considered personal-use property, if you had a loss from selling your home, you aren’t allowed to claim the loss.
What is a principal residence?
Your principal residence is your main home where you and/or your family live. Your house, cottage, condominium, apartment, trailer, mobile home, or houseboat can qualify as a principal residence if it meets all of the following conditions:
- It’s a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation you bought so that you can live in a housing unit owned by that corporation
- You own the property alone or with another person
- You, your current or former spouse or common-law partner, or any of your children lived in the property at some time during the year and
- You designate the property as your principal residence.
The land on which your home is located can also be part of your principal residence. Refer to the Canada Revenue Agency (CRA) website for more information on the requirements for qualifying land as part of your principal residence.
My home was my principal residence for every year I owned it
If your home was your principal residence for every year you owned it, you don’t have to pay tax on the capital gain from the sale (principal residence exemption).
Prior to 2016, you didn’t have to report the sale of your principal residence on your tax return. However, starting in 2016, you’ll need to report basic information (date of purchase, proceeds from the sale, description of the property, etc.) on your tax return to claim the principal residence exemption.
My home was my principal residence for some of the years I owned it
If your home was your principal residence for only some of years that you owned it, you’ll need to report the part of the capital gain from the sale of the property for the years it wasn’t your principal residence. To do this, you’ll need to download and complete the following forms from the CRA’s website:
- T2091(IND): Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust)
- T2091(IND)-WS: Principal Residence Worksheet
Once these forms are completed, enter the relevant information on Schedule 3 (and Schedule G, if you’re a Québec resident) in H&R Block’s tax software. The CRA also requires that you submit the paper copy of these forms to your local tax centre.
Note: If you’re the legal representative of a deceased person, complete and file form T1255 to designate their property as a principal residence.
You’ll also use form T2091(IND) to calculate the capital gains if you sold, or are considered to have sold, a property for which you or your spouse filed an election to report a capital gain on form T664 or T664 (Seniors) and:
- the property was your principal residence for 1994 or
- you are designating it in 2017 as your principal residence for any tax year
Only part of my home was my principal residence
If only a part of your home qualifies as your principal residence and you used the other part to earn rental or business income, you have to split the selling price and the adjusted cost base between the part you used for your principal residence and the part you used for other purposes. You can split the amounts based on the area used as principal residence (square meters or number of rooms) versus for other purposes, as long as the split is reasonable.
Note: The adjusted cost base is the cost of a property plus any expenses you paid to buy it, such as commissions and legal fees. The cost of a capital property is its actual or deemed cost and capital expenditures, such as the cost of additions and improvements to the property. Keep in mind, you can’t add current expenses, such as maintenance and repair costs, to the cost base of a property.
You’ll also need to complete Schedule 3 (and Schedule G, if you’re a Québec resident) for any gains on the part of your home that was used to produce income.
Changes in use
If you change the use of your principal residence to a rental or business property or vice versa, you might have a capital gain or loss.
Every time you change the use of a property, you are considered to have sold the property at its fair market value (FMV) and to have immediately bought the property again for the same amount. FMV is usually the highest value you can get for your property in an open market. You’ll need to report the capital gain or loss in the year the change of use takes place. There are exceptions and in certain situations the rules for change in use don’t apply. Refer to the CRA website to learn more on what these exceptions are.
Example: Let’s say that you bought your principal residence for $200,000. Two years later, you changed its use to a rental property and the fair market value is $300,000 at that time. This becomes the new cost of your property. The gain of $100,000 in the first two years would be tax exempt since the property was your principal residence.
Now, let’s say you sold the rental property three years later for $450,000, you would then have a capital gain of $150,000 and would need to pay tax on this amount as the property was no longer your principal residence. If, instead, you decide to change the use of the rental property to your principal residence again, the fair market value of $450,000 will be the new cost of your property and you’ll still need to report the gain of $150,000.
If you sold your principal residence* in 2018, you’ll need to complete the TP-274-V: Designation of Property as a Principal Residence form (as well as the federal T2091(IND) form), to avoid having all or a portion of any profit considered a taxable capital gain.
*You can designate a property as your principal residence only if you, your spouse, your former spouse, or your child ordinarily used the property as your housing unit during the year and if all of the following conditions are met:
- You own the property, alone or jointly with another person.
- You are not designating any other property as your principal residence for the year.
- For years after 1981, no other property was designated as a principal residence for the year by
- you or your spouse (unless you lived apart throughout the year, due to a judicial separation or a written separation agreement)
- your child, unless, during the year, he or she had a spouse or was aged 18 or over
- your father or mother, or your brother or sister (unless your brother or sister had a spouse or was aged 18 or over), if you yourself did not have a spouse and were not aged 18 or over during the year
If you designated the property as your principal residence or made an election to change the use of the property with the Canada Revenue Agency (CRA), you must mail Revenu Québec a copy of any documents sent to the CRA proving the designation or choice. Include your Designation of a property as a principal residence by an individual (other than a personal trust) [T2091(IND)] form (if applicable), as well as your federal return. Mail them to Revenu Québec by the latest of these dates:
- the 30th day following the election or exercise of the election with the CRA
- the filing due date of your return
If you fail to provide Revenu Québec with a copy of the documents you submitted to the CRA within the prescribed time, you might have to pay a penalty of $25 per day, up to a maximum of $2,500.
Remember, if you have a capital gain from the sale of your property, you’ll also need to complete Schedule 3 and Schedule G to report the gains.
Where can I claim this?
Follow these steps in H&R Block’s 2018 tax software:
- Under the PREPARE tab, click the IN THIS SECTION icon.
- Click the REQUIRED icon. You will find yourself here.
- At the bottom of the Special situations page, answer Yes to the question: In 2018, did you sell your principal residence (or a property that used to be your principal residence), or do you have a deemed disposition to report for your principal residence (your principal residence is now a rental property or business, etc.)?
- Select the applicable option in the list, then click Continue. When you arrive at the Principal residence designation page, enter your information into the tax software.
Note: If you’re a Québec resident, you also need to complete form TP-274-V: Designation of property as a principal residence. To do this, make sure you followed the previous steps, and then follow these:
- Under the PREPARE tab, click the REQUIRED icon.
- Go to the QC - Principal residence designation page.
- When you arrive at the QC - Principal residence designation page, enter your information into the tax software.
Note: If you also need to complete Schedule 3 and Schedule G to report capital gains from the sale of your property, these can be found under the PENSION PLANS AND INVESTMENTS icon on the PREPARE tab. Both these forms are combined in H&R Block’s tax software.