The Principal Residence Exemption (PRE) is an income tax benefit in Canada that indicates that you do not need to pay any taxes on the Capital Gains resulting from the sale of the property which is deemed to be Principal Residence.
Some of the requirements that must be met to qualify for PRE include:
•Type of property- a housing unit,
•Ownership status- must own the property (sole ownership or co-ownership),
•Ordinarily inhabited by taxpayer or by his or her spouse or child- lived in the property; and
•Designated the property as principal residence- if an individual has multiple properties that are used for personal purpose, only one property may be designated as a principal residence for a year.
Only partial PRE is allowed if the property was deemed to be principal residence for a few years during the period of ownership.
For a non-resident of Canada, their residency status will determine the period and eligibility of PRE during sale of principal residence. If an individual converts their principal residence in Canada to rental property, then 45(2) elections can be submitted with Canadian Income tax return in the year of conversion to defer the capital gains to a later year. The election under 45(3) can be submitted when rental property converts to principal residence in Canada.
Even though the capital gain on disposition of principal residence is exempt, it should be disclosed in the Canadian income tax return in year of sale in Form T2091.
If you have recently sold a Canadian property or are planning to sell one, speak with us to discuss the tax implications related to sale on your tax return.
