By: Jim Stathakos CPA and Besse Vergados BA (Honours)

Thinking of selling your home or gifting it to your children? Here are key points to help you avoid unexpected income tax.

If your home qualifies for the principal residence exemption, you do not pay income tax on the gain when you sell or transfer it to your children.

You can designate the home you ordinarily lived in as your principal residence for the years you owned and used it as such. Make the designation in the year of disposition on your tax return by completing Schedule 3 and Form T2091.

A disposition includes a sale, transfer, gift or change in use such as moving out of your home and renting it. 

Lets consider an example.

In 1990, George bought a family home in Toronto for $500,000.

In 1992, after his father’s death, he inherited a house in Crete with a cost base of $CDN120,000. 

Ownership of a property outside Canada, having a cost of more than $100,000, must be reported each year on Form T1135, unless certain exceptions are met. 

Every year, George and his family used this home for their annual vacations to Crete. It meets the definition of personal use property and is excluded from being a specified foreign property. Accordingly, George was not required to disclose this on his return by completing Form T1135. 

If George had rented the Cretan house, say for more than 50% of the time, then he would have been required to disclose the property on Form T1135. 

Lets look at 3 scenarios.

Scenario 1: In January 2024, George, now a widower, sells his Toronto home for $2,000,000 and moves to a retirement home. He reports the sale on his 2024 tax return and designates the property as his principal residence for 1990 to 2024.

George could have gifted the home to his children, but he needed the cash from a sale.

For tax purposes, the result is the same whether George sells the home or gifts it to his children.

Because the principal residence exemption applies, the $1.5 million gain is tax-free.

The CRA allows the exemption only if you report the sale and make the designation. A late designation may still be accepted, but penalties can apply.

Scenario 2: Unhappy in the retirement home, George buys an older house in September 2024 for $1,000,000, spends $300,000 on renovations, moves in in February 2025. He sells it In September   2025 for $2,000,000 after living there for eight months.

Effective in year 2025, subsection 12(12) treats profit from a Canadian housing unit held for less than 365 consecutive days as business income, not a capital gain.

As a result, the $700,000 profit does not qualify for the principal residence exemption and is taxed as business income. At a 50% tax rate, George would owe income tax of $350,000. 

Scenario 3: George then retires to Crete and lives in the inherited home. If he keeps sufficient ties to Canada, such as family and a bank account in Toronto, that home can become his principal residence. 

When he dies, his estate would not pay Canadian tax on the gain if the principal residence exemption applied.

Remember these five points:

1. If you sell, transfer, or gift your family home, report the disposition, and designate it as your principal residence using the required forms. The penalty for not reporting it, or filing it late is the lesser of $8,000 or $100 per late month. 
2. If you sell a home that you owned or lived in for less than 365 consecutive days, the gain will be assessed as business income unless an exception for certain life events applies such as death, separation, serious disability, or illness. Any loss is deemed to be $Nil.
3. If foreign property, bank accounts, investments, and real estate excluding personal use property – such as a vacation home, has a total cost base over $100,000, you must file Form T1135. Reporting is based on cost, not fair market value. Failing to disclose specified foreign property can result in substantial penalties. 
4. A home outside Canada can qualify for the principal residence exemption if you ordinarily live there and remain a Canadian tax resident.
5. If a foreign home is sold or transferred on death, it is deemed disposed of at fair market value. If it was the principal residence, the gain is not taxable in Canada.

Report any sale or transfer on time to avoid penalties.

There may be other issues to consider when selling a principle residence in Canada or in Greece. For more information, regarding your specific situation, please consult with your tax advisor.