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Principal Residence Designation and Canada Taxation:

Some of you have asked whether you will have to pay capital gain tax, if your sell your home right away after purchase. Another similar question is how long you have to live in your home after purchase in order to avoid paying capital gain tax. In other words, when does a home become a “Principal Residence” for Income Tax Purposes in Canada?

Since this is a complex tax issue, you must consult a tax lawyer or a tax accountant. The information contained in or referred to from this page is no substitute for proper tax advice from a qualified tax professional, which I am not. For instance, I have no knowledge of any previous court rulings on this matter. Hence, this is my disclaimer.

To give you some insight though, I do want to refer you to two particular Tax Bulletins from the Canada Revenue Agency or CRA (previously Revenue Canada). You can point to the highlighted Bulletin numbers below and click. The PDF files should open, if you have Acrobat Reader installed. Here they are:

IT-120R6

T4037 (E) Rev 4

You should pay special attention to the section on the “Ordinarily Inhabited” Rule in IT-120R6. The choice of the words is telling. However, that rule does not really spell out definitively how long you, the legal owner, have to have lived in your home before it can be deemed a Principal Residence. Obviously, you will have to live in it for a suitable time before your own circumstances compel you to sell the home. How long, I do believe, will depend on your circumstances. If your intent all along is to flip the home for profit, you may not be able to claim Principal Residence exemption.

You should also remember: A “Principal Residence” is the one residence that its legal owner can sell without having a capital gains tax imposed as long as a new principal residence is purchased within a specified period of time.

If you have no intention to buy a new home as your principal residence whatsoever, you do not get the capital gain tax exemption.

A word of caution, however: if you are in a real estate related business, like if you are a builder or realtor. Chances may not be that good that you can avoid tax liabilities. That means, if you are in the habit of buying a home, live in it for a while and then reselling it, you may not be able to designate your home as Principal Residence in any case. CRA would likely deem that as part of your business. Your gains may be taxed as business income, not capital gain.

So, in a nutshell, you should pay for good and professional tax advice on this issue. I am afraid there may not be any easy clear answers. There does not appear to be any definitive rule of thumb that you can rely on – not from the CRA anyway.

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