Principal Residence [Tax Exemption] When You Sell Your Home!

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Many people have always dreamed of owning their own cottage.

And since Covid-19 it seems more people are making that dream a reality.

Possibly because they’ve saved money due to non-travel, no camp for the kids, and things like that. Or they just want more space, a different space, and a change of scenery.

It might also be more justifiable to buy a cottage since more people are working from home and will likely continue to do so.

Let’s face it, working from your living room looking out at the lake, or sitting on the dock with our computer, doesn’t sound like a punishment.

We all know that if we sell our own principal residence we don’t have to pay “Capital Gains Tax” on the profit we’ve made has homeowners.

In other words, we don’t pay tax on the profit we made between our original purchase price and the price we sold for. It’s called a “Principal Residence Tax Exemption”.

But I’m often asked if [second] homes such as cottages or vacation properties are also exempt from capital gains tax?

The answer is yes, but you do have to meet some criteria:

• You, your spouse or former spouse or a child must “ordinarily occupy” the house for some time during the year.
• If your property is over half a hectare – about 1.5 acres then you must be in a position to establish that the land over half a hectare is necessary for the “use and enjoyment” of your home.
• Your 2nd property or cottage can NOT be rented out or used by non-family members.
• You have to have been a resident in Canada throughout the period of ownership.
• As a general rule, you can claim the Principal Resident Exemption on only one home at a time.
  So you don’t want to sell BOTH of your principal residences at the same time.
• Subject to new rules that were introduced in 2016, it may be possible for certain Trusts to claim the Principal Resident Exemption provided that a corporation is not a beneficiary, and the trust designates a beneficiary (or their spouse, common-law partner or child) of the trust who ordinarily inhabits the property (referred to as a “specified beneficiary”). 

But that’s definitely a more detailed conversation you should have with your accountant & lawyer.

By the way, as Ontario’s First Real Estate Divorce Specialist I can also confirm that much of what I’ve just shared applies to “Matrimonial Homes”.

In other words, when a couple is getting a divorce and selling the matrimonial home one spouse can’t do it without the other spouse’s consent.

There is a specific signature required on the Purchase & Sale Agreement called “Spousal Consent” for the sale to be binding.

But sometimes a client will ask me to sell their cottage or second property without the spouse knowing because they owned it prior to marriage and therefore don’t need “Spousal Consent”.

Not true. If they couple (or family) used the second property on a regular basis as a family, the second property can also be considered a second matrimonial home.

Therefore the same laws applies as when selling the principal matrimonial home.

If you are thinking of buying or selling a home and want to talk more about the PRINCIPAL RESIDENCE TAX EXEMPTION & how to do it safely and smoothly I’m always happy to chat. 

You can email or call me any time.[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]