Principal Private Residence (Canada)
What is '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 have only one principal private residence at any given time. In order to qualify, the house must be owned by the taxpayer or couple, or inside a personal trust.
BREAKING DOWN 'Principal Private Residence (Canada)'
The principal private residence is exempt from capital gains tax. 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.
Tax Rules for Principal Private Residences in Canada
In Canada, a home can be designated as a principal private residence for each year in which a Canadian taxpayer, their spouse or common-law partner and/or their children were residents in Canada and lived in it during a given year. A Canadian taxpayer may only allowed to designate one home as their principal private residence for a particular year. 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 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 a taxpayer owned the home 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 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. Now, since 1981, couples and their unmarried minor children can only designate one home in total as their principal private residence each year.
Starting with the 2016 tax year, Canadian taxpayer/homeowners were required to report basic information on their principal private residences, such as date of acquisition, date of sale, proceeds of disposition and a description of the property on your 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.