The Principal Residence Exemption
The principal residence exemption is a significant tax benefit in Canada, shielding homeowners from capital gains tax when they sell their primary home. However, for a property to qualify for this exemption, it must meet certain criteria. Let’s explore these requirements and the remedy available if a taxpayer misses a crucial step in the process.
The Property Must Be a Specific Type
The principal residence exemption applies to certain types of property, such as houses, condos, or cottages, that are primarily used for living purposes. The property must be suitable for year-round habitation, and properties like vacant land may not qualify unless they meet specific criteria.
Ownership by a Taxpayer
Only properties owned by the taxpayer can qualify for the principal residence exemption. This means you must hold legal title to the property. Ownership can be direct or through a beneficial interest in a trust, provided the trust meets the necessary conditions.
Ordinarily Inhabited by the Owner
The property must be “ordinarily inhabited” by the taxpayer or their family during the year. This means it must be used as the main place of residence for at least part of the year. Occasional absences, such as vacations or work-related relocations, usually won’t disqualify the property, provided the owner still treats it as their primary residence.
Designation as a Principal Residence
To claim the exemption, the property must be designated as a principal residence for each year that the taxpayer intends to exempt from capital gains. This designation is completed when the property is sold. Taxpayers must prepare and file a T2091 form along with the tax returns for the year of sale.
Without this designation, taxpayers are not entitled to the principal residence exemption, potentially leading to significant tax consequences.
Late Election
In cases where a taxpayer fails to designate the property as a principal residence by filing the T2091 form, there is still a possibility to correct this oversight. Subsection 220(3.2) of the Income Tax Act allows taxpayers to make a late election, potentially preserving their eligibility for the exemption. Taxpayers will usually have to pay a penalty when filing the late election.
Key Takeaway
The principal residence exemption can save homeowners substantial tax, but it’s essential to meet all requirements. If you miss designating your property as a principal residence, you may make a late election, albeit at a potential cost.
For personalized advice on claiming the principal residence exemption or filing a late election, it’s wise to consult with a qualified Toronto tax lawyer. We can help you navigate the complexities of tax law and ensure you’re taking full advantage of available exemptions.
If you need assistance, contact us for free consultation. We will review your facts and outline the steps necessary to resolve your tax problem.
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Disclaimer
Each article/blog post is only meant to provide general information. It is posted on a specific date. Laws and rules change. Please know that it may be out of date. It is not meant to provide legal advice, and it does not provide legal advice. It cannot be relied on. Every tax situation is unique, and that may mean situations differ from this article/blog. If you have legal questions, please consult a lawyer.