KARAKTER Realty · Calgary Downsizing
Downsizing and capital gains: how the Principal Residence Exemption applies
Key takeaways
- If the home was your principal residence every year you owned it, the Principal Residence Exemption usually covers the full gain on a downsizing sale.
- The sale must still be reported on Schedule 3 of your T1 return, with the designation on Form T2091.
- A rental suite or a second property such as a cabin can change the answer; only one property per family can be designated each year.
How the exemption works
The Principal Residence Exemption removes the capital gain on a home you designate as your principal residence, for each year it qualified. A family can designate only one property per year. For a downsizer who has lived in the same Calgary house the whole time they owned it, the full gain is usually exempt, however large it has grown.
The formula adds one extra year to the years designated, which covers the overlap when you own the old home and the new one in the same calendar year. That matters for a buy-first downsize.
The reporting you still have to do
Since 2016 the CRA has required every principal residence sale to be reported on Schedule 3 of the T1 return, even when no tax is owing. The designation is made on Form T2091. Missing it can bring a late-filing penalty and puts the exemption itself at risk, so give your accountant the sale details as soon as the sale closes.
Keep the original purchase price, the dates you bought, moved in, and sold, and records of major improvements. Ryan provides the closing statements for the sale.
When the answer changes
A basement suite or part of the home that was rented can reduce the exempt portion, as can years the whole house was rented while you lived elsewhere. Using part of the home for a business can matter too.
The bigger question for many downsizers is a second property. If you also own a cabin, a lake property, or a condo you used yourself, only one property can be designated per year, and the choice affects which gain is taxed. Sometimes it is better to designate the cabin for some years. That is an accountant’s calculation and worth doing before you sell either property.
After the sale
Once the smaller home becomes your residence, it starts earning its own exemption from the year you move in. Investment income from the released equity is taxed normally, and your accountant can tell you how it fits with pension and benefit income.
If the downsize is part of an estate plan, talk to your lawyer as well. How the new home is held, and what happens to it later, is easier to settle now than for your executor to sort out.
Frequently asked questions
Will I pay capital gains tax when I sell my house to downsize?
I also own a cabin. Does that change anything?
We rented out the basement for a few years. Is the exemption gone?
Do I need to do anything at closing?
This page is for general information only and does not constitute legal, tax, or financial advice. Always engage qualified professionals (mortgage broker, lawyer, accountant, financial planner) for your specific situation. KARAKTER Realty is licensed under RECA.
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