Heads Up! What to Look Out For With the Principal Residence Exemption

  • April 02, 2019
  • Caroline Elias

The implementation of various amendments to the Income Tax Act (Canada)[1] on December 14, 2017 saw a marked tightening of the mechanisms that allow a taxpayer to qualify for, and make use of, the principal residence exemption (“PRE”). The PRE provides an exemption from income tax on a taxpayer’s capital gain on the sale of their principal residence.[2] While Canada remains a country where the sale of one’s principal residence is (generally) exempt from capital gains tax, the ability to apply the PRE has become much less intuitive than before.

The aim of this paper is to provide a short summary of some of the road blocks a taxpayer may encounter, and some potential options to negotiate them.

1. General Understanding of the PRE rules since 2017

In order to be eligible for the PRE, there are several requirements that must be met; these requirements are in respect of both the property being disposed of, and the taxpayer claiming the benefit. In no particular order, the following should be considered by any taxpayer wanting to claim the PRE:

  • The property must be a “principal residence” as defined in the ITA. The definition includes, among other types of properties, houses (including the adjacent land, up to half a hectare), vacation homes, condominiums and a share in a co-operative housing corporation;
  • As a general rule, only one residence can be claimed by the family unit at a time. [3] For the purposes of the PRE, the “family unit” includes the taxpayer, the taxpayer’s spouse, and any unmarried children under 18;
  • The property must be ordinarily inhabited an individual, their spouse or former spouse, or a child;[4]
  • The property must be a “capital property”.  Practically, this means that if the property was “flipped” a short time after the purchase, it may not qualify for the PRE;
  • A change in Canadian residency status can affect the ability to claim the PRE; and
  • Restrictions can apply to any property that was rented out for a part of the ownership time.[5]

The PRE eligibility is considered on a year-to-year basis, for each year of ownership. This is reflected in the formula used to calculate PRE, as set out in paragraph 40(2)(b):[6]