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How to sell your house tax-free in Canada

22 February 2019,
 0

Learn how to sell your house tax-free in Canada

In Canada, a homeowner usually does not pay tax on any gains from the sale of a principal residence due to the principal residence exemption (PRE).  This applies only if the property sold served as your principal home for each year of ownership.

According to the Canada Revenue Agency, if you sold a property beginning 2016, you need to report the sale using Schedule 3, Capital Gains and Losses, regardless of your situation.

If you want to know more about selling your house tax-free in Canada and how to handle the matter, keep reading this article to get valuable tips.

 

When does a house qualify as a Principal Residence for Tax Purposes?

 

You may be aware the Canadians can sell their principal residence tax-free due to the principal residence exemption tax. But what can be considered as a principal residence?

A principal residence can be any of the following:

✓   house
✓   cottage
✓   apartment in an apartment building
✓   condo
✓   a duplex
✓   a trailer home, houseboat, or mobile home

Once you have sold your house or part of your property, you can designate it as your principal residence for the number of years that you inhabited it.

4 conditions must be met for your house to qualify as a primary residence.

 

CONDITIONS TO QUALIFY AS A PRIMARY RESIDENCE

Certain criteria must be satisfied so that your home sale can claim the primary residence exception
1.    It must be a residential unit, a leasehold in a housing unit, or  share of a capital stock in a co-op housing corporation you acquired in order to live in the housing unit owned by the corporation.

As mentioned earlier, a residential unit can be a house or a mobile home or trailer, a condo, or even a houseboat.

2.    You must own the property or jointly with another person such as a spouse or a common-law partner.
3.    You, your current or former spouse or partner, or your children, must have inhabited the residence during the tax year.

It is entirely possible to have lived in 2 primary residences in the same year, such as when you sold one and moved in to a new residence.

A principal residence must be a capital property which results in a capital gain or less. It cannot, therefore, be a business inventory, which is when you buy and sell properties to gain income.

If your house was not your principal residence for some of the years you have owned it, such as if you have rented it out, you will need to report it. The same applies in a situation wherein a portion of your house produces an income (i.e. used for a business). You will need to split the sale price between the residence and the income-generating portion.

In other words, if you have used your house to generate income, you will need to report the sale of the house on your tax return.

4.    You must designate the property as your primary residence.

 

The size of the land on which your house is located is important and can be considered as part of your principal residence. Generally, the provisions under the law limit the area to ½ hectare (or 5,000 square meters).  There are certain exemptions, however, in case your land is in excess of ½ hectare. Examples of this exemption would be if you bought the land in an area where the minimum lot size is required to be more than ½ hectare for you to be able to buy it and build thereon.

 

Owning more than 1 residence

You may be wondering if it is possible to claim more than 1 principal residence. For the years prior to 1982, it is possible for a married couple to claim more than 1 principal residence for each year. However, after 1982, the law only allows  a family to claim 1 house as the primary residence for each year.

The definition of family, for 2001 to the current year, includes:

  • You
  • Your spouse or common-law partner
  • Your children (except married children or those above 18)
  • If without a spouse or partner, the definition of family includes mother and father, brother or sister who are not married and are below 18 years old at the time.

 

Note: For 1993 to 2000, a spouse included a common-law partner. Hence, common-law spouses were not allowed to designate different houses as a primary residence.

 

Scenario:

Tom, a Canadian resident, put his primary residence up for sale in February of 2018. This house has been his residence for the whole 15 years that he has owned it.  In March of 2018, he bought another house and moved in while waiting for the other house to be sold. The “plus 1” rule allows a Canadian to claim 2 residences under the same year for principal residence exemption in situations when one is being sold and another was purchased in the same year. In this case, Tom could use line 179 on page 2 of Schedule 3 to designate the first home as his principal residence for the number of years he has owned and lived in it up to 2018. He must also accomplish Form 2091 (IND) if he sells the property at any time in 2018.

It is recommended that he keeps a copy of these documents as a reference in case he decides to sell the second property in the future.

It is easier to get answers to your questions when selling a property if you have an experienced broker working for you.

 

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Primary residence with rental income – Is it tax free when sold?

Let’s say you have a house you have lived in for many years but sometime during your ownership, you decided to rent out a part of it to get a small income.

Usually, if you begin renting your house, there will be a change in use applied for tax purposes. In some cases, the CRA may consider that the increase in the value of your property from the time you bought it to the time you started renting it is capital gains of which 50% would be taxable.

However, there are certain cases when it could still be tax-exempt under the primary residence exemption.

  • If the rental portion is small in size compared to your entire house
  • If you made no structural changes to the property to deem it appropriate for earning income
  • You have not claimed any capital cost allowance of tax depreciation of your house

Turning a house into a rental property may not be tax-free in some cases and could make you liable to pay capital gains tax. To reduce your taxes, you can still claim primary residence exemption as long as you qualify.

 

The importance of the role of a real estate broker

Selling a house anywhere in Canada can be a complicated process. It requires knowledge and expertise to avoid legal and financial setbacks.  For this reason, it is critical to have a professional real estate broker by your side.

Of course, there is no legal requirement for you to hire a broker but it simply makes a lot of sense to do so.

How much should you sell your house for? How do you market your property to speed up the sale? How can you make your house more attractive to home buyers?

These are just some of the basic questions you need to ask. A good broker will be able to help you navigate the complicated real estate market and ensure a successful transaction.

Most people are reluctant to sell a house in Canada with a real estate broker because they feel that the commission will put a lot less money in their pocket.

 

However, consider these very important statistics:

    • Economic and demographic factors, along with recent policy changes that have impacted homebuyers’ access to mortgage financing, have made the competition even more fierce in most Canadian real estate markets. Sales are expected to decline by the end of this year, according to data from the Canadian Real Estate Association.
    • The national average price is also expected to drop to $494,000 by the end of this year and forecasts reflect a continuing decline in sales in British Columbia.
    • Interest rates have also risen, possibly reducing the buying capacity of home buyers
    • Majority of home buyers still prefer to work with real estate agents and brokers. If you, as a seller, don’t have a broker or agent, you may be at a disadvantage because many potential buyers won’t be able to see you property. The truth of the matter is that brokers work within their networks and steer buyers to homes that are in their radar.

 

With the aforementioned factors affecting the real estate market, it is critical to have an experienced professional to handle the marketing of your property to be able to reach as many buyers as possible.

Real estate agents and brokers are skilled at negotiations and can bring the highest possible price to the table to make it as profitable for you as possible,

Are you worried about how much commission to pay a real estate broker for the sale of your house?

 

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