When you sell your home, you may realize a capital gain. If the property was used solely as your principal residence for every year you owned it, you do not have to pay tax on the gain. If at any time during the period you owned the property, it was not your principal residence, or used solely as your principal residence, you may have to pay tax on all or part of the capital gain. If you sold property in 2022 that was, at any time, your principal residence, you must report the sale on Schedule 3.

 

Your principal residence can be any of the following types of housing units:

• a house
• a cottage
• a condominium
• an apartment in an apartment building
• an apartment in a building such as a duplex or triplex
• a trailer, mobile home or houseboat

 

A property qualifies as your principal residence, for any year, if it meets all of the following conditions:

• it is a housing unit, a leasehold interest in a housing unit or a share of the capital stock of a co-operative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation
• you own the property alone or jointly with another person
• you, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year
• you designate the property as your principal residence

The land on which your home is located can be part of your principal residence. Usually, the amount of land that you can consider as part of your principal residence is limited to one-half hectare (1.24 acres). If you can show that you need more land to use and enjoy your home, you can consider more than 1.24 acres as part of your principal residence. For example, this may happen if the minimum lot size imposed by a municipality at the time you bought the property is larger than one half hectare.

 

Designating a principal residence

You designate your home as your principal residence when you sell or are considered to have sold all or part of it. You can designate your home as your principal residence for the years that you own and use it as your principal residence. However, in some situations you may choose not to designate your home as your principal residence for one or more of those years.

 

Number of principal residences you can designate

For years before 1982, more than one housing unit per family can be designated as a principal residence. Therefore, a husband and wife can designate different principal residences for these years. However, a special rule applies if members of a family designate more than one home as a principal residence. For more information, see Income Tax Folio S1-F3-C2, Principal Residence.

For 1982 and later years, you can only designate one home as your family's principal residence for each year. For more information, see Income Tax Folio S1-F3-C2, Principal Residence.

For 1982 to 2000, if you had a spouse or were 18 or older, your family included:

• you
• a person who throughout the year was your spouse (unless you were separated for the entire year under the terms of a court order or a written agreement)
• your children (other than a child who had a spouse during the year or who was 18 or older)

If you did not have a spouse and were not 18 or older, your family also included:

• your mother and father
• your brothers and sisters (who did not have spouses and were not 18 or older during the year)

For 1993 to 2000, since a spouse included a common-law spouse, common-law spouses could not designate different housing units as their principal residences for any of those years.

After the year 2000, the above definition applies except that the reference to spouse is replaced by "spouse or common-law partner." Neither spouses nor common-law partners (see Definitions) can designate different housing units as their principal residence.

 

Disposition of your principal residence

When you sell your home or when you are considered to have sold it, usually you do not have to pay tax on any gain from the sale. This is the case if the property was used solely as your principal residence for every year you owned it or for all years except one year, being the year in which you replaced your principal residence. If you sold your home in 2022 and it was your principal residence, you have to report the sale and designate the property on Schedule 3, Capital Gains (or Losses), in 2022.

For the sale of a principal residence in 2022, we will only allow the principal residence exemption if you report the disposition and designation of your principal residence on your income tax return. If you forget to make this designation in the year of the disposition, it is very important to ask us to amend your income tax return for that year. The CRA can accept a late designation in certain circumstances, but a penalty may apply.

 

Change in use

You can be considered to have sold all or part of your property even though you did not actually sell it.

For example, this is the case when:

• you change all or part of your principal residence to a rental property
• you change your rental property to a principal residence
• you stop using a property to earn or produce income

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 reacquired the property for the same FMV, unless you make an election as described below. The resulting capital gain or capital loss (in certain situations) must be reported in the year the change of use occurs.

If the property was your principal residence for any year you owned it before you changed its use, you do not have to pay tax on any gain that relates to those years. You only have to report the gain that relates to the years your home was not your principal residence.

 

Changing all your principal residence to a rental property

When you change your principal residence to a rental property, you can make an election not to be considered as having started to use your principal residence as a rental property. This means you do not have to report any capital gain when you change its use. If you make this election, you cannot claim CCA on the property. Any income from a property, minus any applicable expenses, must be reported for tax purposes.

While your election is in effect, you can designate the property as your principal residence for up to four years, even if you do not use your property as your principal residence. You can only do this if you do not designate any other property as your principal residence for that same time period.

You can extend the four-year limit for an unlimited time if all of the following conditions are met:

• you live away from your principal residence because your employer, or your spouse's or common-law partner's employer, wants you to relocate
• you and your spouse or common-law partner are not related to the employer
• you return to your original home while you or your spouse or common-law partner are still with the same employer or before the end of the year after the year in which this employment ends, or you die during the term of employment
• your original home is at least 40 kilometres (by the shortest public route) farther than your temporary residence from your or your spouse's or common-law partner's new place of employment

If you make this election, there is no immediate effect on your tax situation when you move back into your residence. If you change the use of the property again and do not make this election again, any gain you have from the sale of the property is a capital gain and may be subject to tax.

To make this election, attach a letter signed by you, and send it with your income tax return. If you are filing your taxes electronically, send this letter to your tax centre. To find your tax centre go to Find a CRA address. The letter must describe the property and state that you are making an election under subsection 45(2) of the federal Income Tax Act.

If you started to use your principal residence as a rental or business property in the year, you may want information on how you should report your business or property income.

 

Changing all your rental property to a principal residence

When you change your rental property to a principal residence, you can elect to postpone reporting the disposition of your property until you actually sell it. However, you cannot make this election if you, your spouse or common law partner, or a trust under which you or your spouse or common law partner is a beneficiary has deducted CCA on the property for any tax year after 1984, and on or before the day you change its use.

This election only applies to a capital gain. If you claimed CCA on the property before 1985, you have to include any recapture of CCA in your rental income. Include the income in the year the property use was changed:

• You cannot make this election if you or your spouse or common-law partner, or a trust under which you, your spouse or common-law partner is a beneficiary, has deducted CCA on the property for any tax year after 1984 and on or before the day you change its use.
• To make this election, attach a letter signed by you, and send it with your income tax return. If you are filing your return electronically, send the letter to your tax centre. To find the address for your tax centre, go to Find a CRA address. The letter should describe the property and state that you are making an election under subsection 45(3) of the federal Income Tax Act.
• You have to make this election by the earlier of the following dates:
• 90 days after the date we ask you to make the election
• the date you have to file your income tax return for the year in which you sell the property

If you make this election, you can designate the property as your principal residence for up to four years before you occupy it as your principal residence.

 

Changing part of your principal residence to a rental property or vice versa

Before March 19, 2019, you could not elect to avoid the deemed disposition that occurs on a partial change in the use of a property. However, starting on March 19, 2019, depending on your situation, you can elect under subsection 45(2) or 45(3) of the federal Income Tax Act that the deemed position that normally arises on a partial change in use of property not apply.

Even if you do not make the election, if you started to use part of your principal residence for rental or business purposes, the CRA usually considers you to have changed the use of that part of your principal residence unless all of the following conditions apply:

• your rental or business use of the property is relatively small in relation to its use as your principal residence
• you do not make any structural changes to the property to make it more suitable for rental or business purposes
• you do not deduct any CCA on the part you are using for rental or business purposes

Generally, if you do not meet all of the above conditions, you will have a deemed disposition of the portion of property that had the change of use, and immediately after, you will be deemed to have reacquired that portion of property. The proceeds of disposition and the cost of the reacquisition will be equal to the proportionate share of the FMV of the property, determined at that time.

Subsequently, when you actually sell the property you have to take all of the following actions:

• Split the selling price between the part you used for your principal residence and the part you used for rental or business purposes. The CRA will accept a split based on square metres or the number of rooms as long as the split is reasonable.
• Report any capital gain on the part you used for rental or business purposes. You can also make a principal residence designation for the portion of the property for which there was no change in use as your principal residence, by completing Schedule 3 and Form T2091(IND), in order to claim the principal residence exemption for that portion of the gain.

 

For more information, visit CRA website at

https://canada.ca/en/revenue-agency/services/forms-publications/publications/t4036/rental-income.html#P632_58016