You’ve lived in your home for years. After years of memories, commutes, and dinners together, you’re ready to sell and move on. As you picture the sale, our team at Mortgage Connection knows that one question tends to pop up. How much of that money goes to the government?
When you sell a home that qualifies as your principal residence, you can generally claim an exemption from capital gains tax. However, tax rules can differ for rental properties, second homes, and homes bought to resell for a profit. GST/HST may also apply to certain sales of new or substantially renovated homes, while property taxes are typically adjusted between the buyer and seller at closing.
What Taxes Do You Pay When You Sell Your Home in Canada?
Your tax bill depends largely on how you used the property. A home you lived in is treated very differently from a rental or a cottage you visited on weekends.
These are the main taxes and costs that can come up when you sell:
- Capital gains tax on the profit from some property sales.
- GST/HST on certain new or renovated homes.
- Property tax, which gets split between you and the buyer.
What Is the Principal Residence Exemption?
The principal residence exemption is the rule that lets you sell your main home without paying tax on the gain. A gain is the profit between what you paid for the home and what you sold it for.
Which Homes Qualify
More types of homes count than you might think. A house, condo, cottage, mobile home, or even a houseboat can qualify as a principal residence. The property must meet the CRA’s eligibility requirements, including ownership and qualifying occupancy, and you must designate it as your principal residence.
Your family can name only one main home each year, so if you own a house in Edmonton and a cabin at a lake, you can only pick one to declare as your principal residence.
Why You Still Report a Tax-Free Sale
Even when you owe nothing, the Canada Revenue Agency, or CRA, still wants to hear about your sale.
Talk to a mortgage broker or an accountant, and take the following steps to help you stay on track:
- Report the sale and designate your principal residence on your tax return. Schedule 3 and Form T2091(IND) are generally required.
- File accurately and on time. The CRA may accept a late designation in certain circumstances, but a penalty can apply.
- Keep your purchase, improvement, and sale records. The general record-retention period is 6 years, but some property-related records may need to be kept longer.
When Capital Gains Tax Applies to Your Sale
Second Homes, Rentals, & Suites
When you sell a rental property or a second home, such as a cottage, some or all of the gain may be taxable. Your tax treatment depends on how you used the property, whether it qualified as your principal residence for any of the years you owned it, and whether any special rules apply. Investors with a second property in Calgary or Edmonton often run into this.
A basement suite works a little differently. Renting out a small part of the home you live in often keeps your full exemption. However, if you claim depreciation on that space, also called capital cost allowance, it can change things.
The 365 Day Flip Rule
When you sell a home within 365 days of buying it, the CRA treats all of the profit as business income. That means 100% of it is taxable. A flipped home also doesn’t qualify for the main home exemption.
Life doesn’t always go to plan, so the rule has exceptions for sales linked to:
- The passing of a family member
- A separation
- An illness
- A job loss
- A relocation
Other Taxes & Costs When Your Sale Closes
GST/HST on New or Renovated Homes
Resale homes are generally exempt from GST/HST. However, it may apply if you’re selling a newly built or heavily renovated home. If you’re selling a new or substantially renovated property, speak with a tax professional to determine whether GST/HST applies and whether any rebate provisions are relevant to your situation.
Property Tax Adjustments
The year’s property tax is split based on how many days each owner held the home. Your lawyer’s statement of adjustments, a summary of who owes what at closing, shows the split.
Say you paid the full year’s tax back in spring and your sale closes at the end of September. The buyer may pay you back for their share of the year.
Rules for Non-Residents
Living outside Canada when you sell adds a few steps. You’ll likely need a clearance certificate from the CRA.
Unless the required certificate or other acceptable arrangements are in place, the purchaser may have to withhold part of the sale proceeds and remit it to the CRA. The amount and process depend on the property and your circumstances.
Because the requirements and deadlines can be complex, consider speaking with a tax professional or lawyer experienced in non-resident property sales before closing.
How to Lower the Tax When You Sell Your House
Simple Steps Before You List
A little prep before your sign goes up can help you keep more of your sale money:
- Keep records of the years you owned and lived in the property so you can accurately designate it as your principal residence when you sell.
- Save receipts for renovations, commissions, and legal fees.
- Talk with a tax professional, like an accountant, about your situation.
Plan Your Next Mortgage with Your Sale in Mind
The money from your sale can shape your next home purchase. It can become a bigger down payment on a larger home, or it could shrink the mortgage on a smaller place.
If your mortgage is coming up for renewal soon, or if you’re thinking about moving, we recommend reviewing your options sooner rather than later. Mortgage brokers in Calgary can explain your choices in plain language.
Your Next Steps with Mortgage Connection
Selling your home is a big step, and knowing the tax rules can help you plan with a clear head. Whether you’re renewing, upsizing, buying your first home, or are new to Canada, the right mortgage can make your sale money go further. Call or fill out the online form to chat with one of our mortgage brokers today.
