The capital gains tax, implemented by the federal government back in 1972, comes into play when you sell an asset—be it a stock, bond, or home—at a price higher than what you initially paid for it.Now, when it comes to selling your home, you might end up with a capital gain. If your property served as your main residence throughout your ownership, you're in the clear from paying taxes on the gain. However, it's crucial to report the sale to the Canada Revenue Agency (CRA). But here's the catch: if, at any point during your ownership, the property wasn't solely your main residence, you might not qualify for the full principal residence exemption on the capital gain. In such cases, reporting becomes a must.
When selling a property, reporting is done on Schedule 3, Capital Gains (or Losses), and Form T2091(IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust). To secure the principal residence exemption, it's imperative to report the disposition and designation in your income tax and benefit return.
And don't let it slip your mind—forgetting to make this designation in the year of sale means you'll need to request the CRA to amend your income tax and benefit return for that year. While the CRA may accept a late designation under certain circumstances, a penalty could be on the horizon.
Additional factors come into play. If you've owned the property for less than a year, your capital gains are considered short-term and taxed at your regular income tax rate. For ownership exceeding a year, gains are deemed long-term and subject to a lower capital gains tax rate.
If your home wasn't your main residence throughout your ownership, you must report the portion of the capital gain related to the years you didn't designate the property as your main residence. This involves completing Form T2091(IND) and the relevant sections of Schedule 3 on page 2.Seeking advice from a lawyer or accountant is vital in navigating this terrain.