Before 2016, if you sold your property, and it was your principal residence for every year you owned it, you did not have to report the sale to claim the principal residence exemption. Beginning in 2016 through 2021, the sale of your principal residence must be reported on your T1 income tax return. The sale of your principal residence does not usually result in a capital gain. But the new reporting requirement has led to some confusion regarding capital gains on a portion of your principal residence used for rental or business income. Although the income tax laws regarding your principal residence have not changed, they are now being enforced.
Here’s a summary:
You’re usually considered to have changed the use of part of your principal residence when you start to use that part for rental or business purposes. However, you are NOT considered to have changed it’s use if:
1) Your rental or business use of the property is relatively small (CRA defines this as 30-40%) in relation to its use as your principal residence;
2) You do not make any structural changes to the property to make it more suitable for rental or business purposes; and
3) You do not deduct any Capital Cost Allowance (Depreciation expense for tax purposes) on the part you are using for rental or business purposes
YOU MUST MEET ALL THREE CONDITIONS TO BE CAPITAL GAIN EXEMPT when you sell your principal residence. The appropriate active tax plan would ensure that the exemption conditions are met in all circumstances if possible.