In Quebec, as in the rest of Canada, there is a tax measure that exempts the sale of a principal residence from tax. The principal residence tax exemption allows homeowners to sell their principal residence without having to pay tax on the capital gains realized from the sale.
Find out how the tax on the sale of a principal residence works in Quebec and Canada with EB Conseil Fiscal!
Definition of the Principal Residence Tax Exemption
The principal residence exemption is a tax provision that allows homeowners to exclude capital gains realized upon the sale of their principal residence from their taxable income. In other words, if a property is designated as the principal residence for all the years it was owned, the capital gain on the sale of the house is entirely exempt from tax.
What Are the Eligibility Criteria?
- Eligible Property Types: The principal residence can be a house, condo, cottage, mobile home, floating home, or even a trailer, as long as it is habitable.
- Use as a Principal Residence: The property must have been ordinarily inhabited by the owner, their spouse, or their children at some point during the year.
- One Property per Year: Only one property can be designated as a principal residence per family (the owner and their spouse) for any given year.
How Is the Exemption Calculated?
The calculation of the principal residence exemption in Canada follows a simple formula that takes into account the number of years the property was inhabited as a principal residence:
Exemption = (Years as a principal residence + 1) ÷ Number of years owned × Capital gain*
*The taxable capital gain on the sale of a house is determined as follows:
- Proceeds of disposition: The amount you receive for the sale of the residence.
- Adjusted cost base (ACB): The original purchase price of the residence + acquisition costs and improvements made.
- Capital gain = (Proceeds of disposition – ACB).
Note that the “+1” represents an additional year. So, if you buy a new residence in the same year you sell the old one, you can benefit from the exemption for both.
Example of a Capital Gains Tax Calculation on the Sale of a Principal Residence
You lived in your house for 10 years. You designated it as your principal residence for 7 years, and your capital gain is $100,000 at the time of sale. The exemption would be calculated as follows:
(7+1) ÷ 10 × 100,000 = $80,000 exempted
In this example, $80,000 of the capital gain would be exempt from tax, and you would only be taxed on the remaining $20,000.
Tax Declarations and the Sale of a Principal Residence
When you buy a new home that becomes your principal residence, or you designate one of your properties as a principal residence, you must notify the tax authorities by completing the following forms:
- Federal form: T2091(IND) Designation of a property as a principal residence by an individual (other than a personal trust).
- Provincial form (Quebec): TP-274-V Designation of a property as a principal residence.
Then, when you sell your principal residence, you must report it on your tax return for the year the sale occurs, even if you have no tax to pay due to the exemption.
Special Considerations
In certain situations, the calculation of the principal residence exemption needs to be adjusted, including:
Mixed-Use Properties (Personal and Rental)
If part of the residence is used for rental or commercial purposes, only the portion used as a principal residence is eligible for the exemption. You will then need to calculate the taxable capital gain proportionally to the rental or commercial use of the property.
Change of Use
If you completely change the use of your principal residence (e.g., converting it entirely into a rental property), this may trigger a deemed disposition at the fair market value.
In the case of a partial change, such as converting part of the residence into an office, this will require an adjustment to the exemption.
Trusts
Certain trusts may designate a property as a principal residence, but specific rules apply.
Get Expert Advice for Planning the Sale of Your Residence
As you can see, the principal residence exemption is a significant tax benefit for homeowners in Quebec and Canada. The tax on the sale of a principal residence will therefore be calculated based on the number of years you lived in it.
Be sure to plan the sale to maximize the years designated for the exemption to minimize taxable capital gains. Keep detailed records of the purchase, improvements, and sale of the residence to justify the ACB and exemption calculations.
Additionally, we recommend seeking advice from a tax expert or accountant to ensure you fully benefit from the principal residence exemption and comply with all tax requirements.
By understanding the eligibility criteria, how the exemption is calculated, and the reporting obligations, you can maximize the tax benefits associated with selling your principal residence.
Do you have questions about the best sales strategy? Consult one of our certified tax specialists to discuss your situation and use the exemption in the most advantageous way!
