If you have sold your home recently or are thinking of selling it, you’ll be happy to know that selling your home normally won’t have any effect on your income tax at all.
Generally, you don’t have to pay any tax on your profits from the sale of your principal residence (a property that you own and that you and/or your family live in during the tax year; see the Canada Revenue Agency’s S1-F3-C2: Principal Residence for a detailed explanation of this term).
However, there are several instances where you will have to pay tax on the sale of your home:
- if you’ve used part of the home to produce income or earn income, or
- if your home has not been your principal residence every year you’ve owned it.
Let’s look at each of these situations in turn.
When You’ve Used Part of Your Home for Income
If part of your home has been used as a business or if you’ve rented out part of it, you will have to report your capital gain on the part of your principal residence that you’ve used to produce income. To do this, you will need 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 rental or business purposes.
The adjusted cost base is the cost of a property plus any expenses to acquire it, such as commissions and legal fees.
How do you know how much to assign to each side of the split? The Canada Revenue Agency leaves that up to you, saying that “You can do this by using square metres or the number of rooms, as long as the split is reasonable.”
The Canada Revenue Agency provides a step-by-step example of how to dispose of a principal residence partly used for earning income (T4037 – Capital Gains).
Capital gains or losses are reported on Schedule 3 of the T1 Personal Income Tax form.
You’ll also want to be aware that you may be able to claim that your whole property is your principal residence even though you are using part of it for rental or business purposes.
When Your Home Has Not Always Been Your Principal Residence
You may have a capital gain to report related to the years your home was not designated as your principal residence. If this is the case, you will need to complete T2091(IND) – Designation of a Property as a Principal Residence by an Individual (Other than a Personal Trust) (Canada Revenue Agency) as part of your T1 income tax preparation.
For more information, see the Canada Revenue Agency’s IT–120R6 – Principal Residence.