Is my property eligible for principal residence exception from capital gains tax?

The income tax rules which relate to this issue are very complex, and the answer to this depends on many factors which are personal to you, and the use you have made of your property (both at the present time and in the past).

The general rule is that your “principal residence” is exempt from capital gains, so if you sell your principal residence for more than what you paid for it, there is no income tax payable.

There is, however, often an issue about what exactly meets the definition of “principal residence”.  The starting point is that you are usually exempt for the residence itself (ie. the building), and that portion of the land reasonably necessary for the use and enjoyment of the residence.  The rule of thumb is that this includes roughly 1 acre of land.  If your property is more than 1 acre, then there is certainly a possibility that you may be required to pay income tax on the gain in value for some portion of your land.

Because of the complexity of this issue, and the need for you to collect factual and documentary evidence to support whatever tax position you take, if you are going to be selling or disposing of your property, you should speak with your accountant now, and begin collecting the necessary information now, rather than waiting until you have a pending sale or until after you have completed a sale.  There’s nothing worse than expecting to receive a certain sum of money from your property, and then suddenly finding out at the eleventh hour that you will be receiving less money because you are required to pay tens of thousands of dollars of income tax.

In addition, if your property or some portion of it does not fall within the principal residence exemption, it will be treated as capital property in your hands for tax purposes.  One consequence of this is that if you should happen to pass away while you still own the property, under the Income Tax Act you are deemed to sell the property at its fair market value as at your date of death.  This often creates an income tax liability which must be paid even though neither you nor your estate have actually sold the property.

Regardless of whether you are selling your property, developing your property yourself, or keeping your property, this is an issue which you will face at some point.  You need to get advice about what your potential tax liability is, and whether there are any means available for you to minimize of defer that tax.