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Rules for Principal Residence Deduction

What Is Principal Residence Deduction?

When you sell your home, you will hopefully, earn money from the sale, or, in tax terms, realize a capital gain. If the property was your principal residence for every year you owned it, you do not have to pay any tax on the capital gains.

While this sounds straight forward, the tax rules around principal residence are very complex, and many Canadians don’t realize when they might owe capital gains tax when they sell a property.

Many believe that the money made on any property is tax-free because of the principal residence exemption.

As a result, many Canadians never declared the sale of a property on their annual tax return. All of that will change with the 2016 tax return.

On October 3, 2016, the Federal Government announced that the sale of a principal residence effective January 1, 2016 must be reported on your tax return in order to claim the principal residence exemption.

A principal residence can include any of the following types of housing units that were used primarily for personal use or enjoyment:

  • House
  • Cottage
  • Condominium
  • Apartment (building or duplex)
  • Trailer or mobile home
  • Houseboat

The principal residence can be any of the above that was owned by the taxpayer and inhabited by the taxpayer, the taxpayer’s spouse or former spouse, or the taxpayer’s children at any time in the year.

The exemption only applies to the building and generally only one-half hectare of land. You can only designate one principle residence for any one year.

If you have more than one principal residence in any given year (say a home and a vacation property) then you will need to designate only one property and recognize you will be taxable on any capital gain associated with the property you have not designated.

How Do Principal Residence Deductions Impact Agriculture?

If you sell your farm and make money on the sale, you have a capital gain, and you need to report that gain on your tax return and pay tax on it.

If your principal residence is part of farm property, you must report capital gains, however you may not have to pay tax on that portion, since your principal residence is exempt from capital gains tax. 

But, just like broader Canadian tax law, agricultural and farm property, can be even more difficult when it comes to determining what is taxed. As a result, rules that apply to a residential home do not completely apply to agricultural lands.

Case in point, a number of tax exemptions do not apply where a property exceeds 0.5 hectares (1.24 acres).

That being said, if you own a farm and plan to pass it onto family or sell it to an arm’s length party, you may be able to take advantage of several tax strategies that can either defer and/or reduce any tax you might otherwise have to pay.

FBC, Helping Farmers Reduce Their Tax Burden

Doing your taxes can be confusing at the best of times. For those who operate or sell a farm, it can be even more difficult, that’s because agricultural and farm property is often a mix of commercial and residential uses.

If you’re thinking of selling your farm or passing it onto family, consult the tax experts at FBC. Canada’s farmers work hard for their money and our farm tax specialists work hard to ensure you keep as much of it as possible.

Whether it’s determining the principal residence deduction, tax preparation, planning, bookkeeping, or financial planning, as Canada’s farm and small business tax specialist, FBC has been helping farm and business owners from coast-to-coast with their tax returns for the last 65 years.

For more information on how an FBC tax consultant can help your small business prepare and file your annual income taxes, call us today at 1-800-265-1002 or submit an online form and an FBC tax specialist will contact you at your earliest convenience.

Connect with your Local Tax Consultant to learn more