What Is a Principal Private Residence (Canada)?
A principal private residence is a home in which a Canadian taxpayer or family maintains its primary residence. A family unit can only have one principal private residence at any given time. In order to qualify, the property must be owned by the taxpayer or couple, or fall inside a personal trust.
- A principal private residence is a home in which a Canadian taxpayer or family maintains its primary residence.
- A Canadian taxpayer may only designate one home as their principal private residence for a particular year.
- The taxpayer, their spouse, common-law partner, and/or children must live in the property for a portion of the year in order for a property to qualify.
- Anyone who sells a second property must report capital gains or losses on the sale.
Understanding Principal Private Residences (Canada)
A Canadian taxpayer may only designate one home as their principal private residence for a particular year. According to Canadian tax rules, a home can be designated as a principal private residence for each year in which a taxpayer, their spouse, common-law partner, or their children were residents in Canada. The Canada Revenue Agency (CRA), has three other requirements in order for a principal private residence to qualify:
- The taxpayer must own the property on their own, or jointly with their spouse or partner
- The property is "a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation"
- The taxpayer designates the property as a principal private residence
Virtually any type of physical residence qualifies, including houses, apartments, duplexes, cottages, houseboats, trailers, or mobile homes. The land on which the dwelling sits also qualifies for the exclusion within certain limits. According to the CRA, the amount of land is limited to 1.24 acres. This limit may be extended in certain cases. if the municipality imposes a minimum lot size.
A private principal residence is restricted to 1.24 acres of land.
Canadian taxpayer-homeowners were required to report basic information on their principal private residences as of the 2016 tax year. They are required to include information such as date of acquisition, date of sale, proceeds of disposition, as well as a description of the property on their income tax and benefit return in order to qualify for the principal private residence exemption. This reporting requirement has applied to every property sold in Canada since 2016, even if the entire gain is fully protected by the principal private residence exemption.
The principal private residence is exempt from capital gains tax. But taxpayers who sell their principal residence must still report the sale. It must also be designated as a private residence on Schedule 3: Capital Gains (or Losses) of their tax return in order to qualify for the exemption, along with Form T2091(IND): Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust). The federal government allows taxpayers to designate two properties as principal residences when they sell one and purchase another during the same year. The taxpayer must designate and report both. This rule is called the "plus 1" rule.
If someone is unable to designate a home as their principal residence for all the years it is owned, a portion of any gain on its sale may be subject to tax as a capital gain. The portion of the gain subject to tax is based on a formula that takes into account the number of years the home was owned by the taxpayer and how many of those years it was designated a principal private residence.
For example, suppose a married couple owns two residences between them—a home in the city and a cottage in the countryside. Only one of these homes can be designated as a principal residence for each year. Before 1982, each spouse could designate a separate property as a principal residence for a particular year, provided the property was not jointly owned. However, that loophole was closed. Couples and their unmarried minor children can now only designate one home in total as their principal private residence each year.
Taxpayers who use part of their residence for business purposes must reasonably split the selling price and the adjusted cost base (ACB) between the portions used as a residence and to produce income. The CRA may consider the property as a residence if the business is secondary to the use of the house as a principal residence, there are no structural changes to the property, and there is no capital cost allowance (CCA) claimed against the property. One example that fits this is a home daycare facility.