The principal residence exemption allows homeowners to exempt some or all capital gains realized from the sale of a principal residence from taxation, providing significant tax savings. However, if two homes are owned during the same period that could qualify as a principal residence, at least some of the gains on one home will be taxable. When selling the first home, homeowners must decide whether to designate it as their principal residence to exempt future gains on the second home, or pay taxes now to fully exempt gains on the second home later. The example demonstrates this choice between paying taxes on one home's sale now or the other home's sale later.
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Principal Residence by the Legal Figure 1. shows the principal resi- Choice #1 Choice #2 In this case, it makes sense to use the
Representative of a Deceased Individual dence exemption formula. principal residence exemption on the
They could designate the vacation They could designate the vacation
and attach it to your terminal tax vacation home for 4 years of owner-
Example home as their principal residence for home as their principal residence for
return. However, these forms must ship. But if they expected that they
Anne and Henry are married, and 4 of the 5 years they owned it, mean- 0 of the 5 years they owned it, mean-
only be attached to your tax returns might sell the city home sooner, or for
they own two homes that could qual- ing that when they sell the city ing that when they sell the city home,
when you have a taxable capital gain a higher capital gain, it might have
ify as “principal residences” for all home, they will at most be able to they will be able to designate it as
to report. In Quebec, you must attach made sense to “save” the exemption
years of ownership – i.e. their “city designate it as their principal resi- their principal residence for all 20 of
Form TP/274 even if the capital gain to use it against the city home.
home” and their “vacation home”. dence for 16 of the 20 years they will the years they will have owned it.
is entirely exempt.
They purchased the city home have owned it. Summary
If you own two homes during the On the vacation home sale, they will
10 years ago and the vacation home On the vacation home sale, the have a tax bill of $50,000 * 40% = As demonstrated, the principal
same period that could qualify for the 5 years ago. Their marginal tax rate, residence exemption can result in
exempt portion of the capital gain $20,000.
principal residence exemption, then now and in the future, is and will significant tax savings if applied
will = [$100,000 * (4 + 1)/5] =
at least some of the capital gains on be 40%. On the city home sale 10 years from appropriately. For further information
$100,000, meaning they will have a
one of those homes will be subject to now, the exempt portion of the capital and advice please contact your
Anne and Henry are selling the vaca- tax bill of $0.
taxation. When you decide to sell the gain will = [$250,000 * (19 + 1)/20] = Investors Group consultant.
first home, you must decide whether tion home today, and will realize a On the city home sale 10 years from $250,000, meaning they will have a
the principal residence exemption capital gain of $100,000. They will now, the exempt portion of the capital tax bill of $0.
should be used on that home. To not be buying a replacement vacation gain will = [$250,000 * (16 + 1)/20] =
make that decision, you will need to home, but will continue to own their $212,500, meaning they will have a In other words, it is a choice between
estimate: city home. They expect to continue to tax bill of ($250,000-$212,500) * 50% Pay $0 in taxes today and $7,500 in
live in the city home for a further 10 * 40% = $7,500. taxes 10 years from now,
3 the number of years you will con- years, and when they sell it in 10
tinue to own and occupy the second years time, they expect to realize a or
home, and capital gain of $250,000.
Pay $20,000 in taxes today and $0 in
3 the future capital gain on the They have two choices. taxes 10 years from now.
second home.
Figure 1.
Principal Residence Exemption Formula
To determine the amount of the capital gain that is exempt from taxation, use the following formula:
# of years as principal residence after 1971 + 1
Exempt portion of capital gain = Realized gain x
# of years of ownership after 1971
The taxable capital gain = (Realized gain – Exempt portion of capital gain) * 50%.