Principal Residence Exemption: How to Calculate the ACB

Congratulations, you sold your principal residence and you made some money (hopefully!).  The icing on top is that you don’t have to pay taxes on your capital gains because of Canada’s Principal Residence Exemption.  This is the biggest tax break that Canadians have and one of the main reasons that Canadian real estate has been on fire and in a bubble for many years (and one way to get rich in Canada).

Imagine, you made over $200,000 in profit from selling your home and you don’t have to pay capital gains tax on it and you get the keep all the profits to yourself.

If you had to pay capital gains tax (in Canada, the capital gains tax is 50%) on the sale of your home, you would be taxed for $200,000 x 50%= $100,000 would be taxed at your marginal rate.  The tax rates depending on your income are here on the Taxtips.ca website.

Starting in the 2016 tax year, the Canada Revenue Agency is asking you to report basic information on the disposal of your principal residence.   You don’t have to pay any taxes on the gains of your sale still, but the government wants this information for their record.

Before this, if you sold your principal residence, you didn’t have to report it to the Canada Revenue Agency.  The Canadian government tightened things up to avoid speculation and flipping of properties and for those that build homes and sell them after living in it shortly in order to not pay capital gains taxes.

ACB principal residence calculation

In this post, I’ll explain what Canada’s Principal Residence Exemption is, how to report the disposal of your Principal Residence, what happens if you don’t declare the sale, and what the Principal Residence Exemption formula is. Finally, thanks to tax software, go over the the Proceeds of disposition tax software reporting.

What Is The Principal Residence Exemption?

As mentioned, the Principal Residence Exemption (PRE) is an income tax benefit in Canada that indicates that you do not need to pay any taxes on the capital gains of your principal residence.  With a simple analogy, a principal residence is kind of like a “TFSA” but for real estate that you live in.

You don’t have to pay taxes on your principal residence when you sell it.

As a home owner, you are eligible for the full principal residence exemption for every year that you own it.  Hopefully you have a decent ROI (return on investment) on your residence.

Principal Residence Disposal Reporting

Starting for the tax year 2016 you have to declare that you disposed of your principal residence on your tax return.

The principal residence exemption form is T2091.

This is reported on Schedule 3, Capital Gains of the T1 Income Tax and Benefit Return

Some of the basic information requested from the Canada Revenue Agency are:

  • Date of acquisition
  • Proceeds of disposition
  • Description of the property

Although it is not required to report your adjusted cost base for your principal residence disposal, it is good form to keep a record of it.  This would be done by adding up all the capital improvements you have done on your principal residence.  You will have to report the proceeds of disposition though.

You can have only one principal residence at one time, so if you have a cottage, that can be your principal residence but your house in town can’t also be a principal residence.

You don’t have to live in your principal residence 100% of the time, just some of the time in the past year.  The main caveat is that the home’s main purpose is not to produce income.

What Happens If YOu Don’t Declare The Sale?

If you don’t declare the sale of your principal residence, there are some hefty fines that you would have to pay.

The penalty from CRA if you don’t declare the disposition or sale of your principal residence is the lesser of two amounts:

  • $8000 or
  • $100 for each month that you are overdue for reporting the sale on your tax return

Deemed disposition (if you change it from principal residence to something else, e.g. for business purposes) is similar to selling your residence, and you still have to declare the disposal of your principal residence.

Principal Residence Exemption Formula

Here are some of the things to include when calculating and reporting the disposition of your property.  This has to be reported in T2091, Designation of a Property as a Principal Residence by an Individual, I guess this would be considered the Principal Residence Exemption Form.

The Principal Residence Exemption Formula according to Taxtips.ca is:

(number of years home was principal residence + 1)  x capital gain
number of years owned

The formula is mainly used if the property was not your principal residence for the entire duration of time that you owned it.

As mentioned, they ask for description of property, proceeds of disposition, and the year of acquisition.

For the description of the property, they ask for your:

  • Street number
  • Street name
  • Unit number (if applicable)

You also have to include the year of acquisition (the year you bought your principal residence) and the proceeds of disposition.

The proceeds of disposition includes the:

  • Sale price
  • Real estate commissions (include the commissions for both the buyer’s agent and seller’s agent, strata document fees if applicable, and include GST)
  • Legal fees (notary public fees or lawyer fees as part of the closing costs)

Proceeds of Disposition Calculation

The Proceeds of Disposition in Box 9954 equals to:

The Sale Price (your accepted offer price) MINUS

the real estate commissions and the legal fees (notary public fees or lawyer fees including GST).

Then you include the number of years that you have owned the property as a principal residence in line 9956.

Related: Square One Insurance Review

Principal Residence Exemption and Tax Software

The tax software usually walks you through these steps, but if you are doing your tax return by pencil and paper, make sure you include the Principal Residence Exemption in Schedule 3 of your tax return.

As mentioned, it’s a good idea to document all your expenses and outlays and capital improvements, such as renovations and upgrades on a separate spreadsheet in case you need information on it later or the Canada Revenue Agency requests this information.

Document your capital improvements and upgrades, how much you spent, the year you completed the upgrade, and other updates that can be documented with the year that it was completed.  Some examples of capital improvements are:

  • New paint
  • New appliances
  • New window fixtures
  • Bathroom remodel

Hopefully that helps clarify what is the Principal Residence Exemption and when and what you have to declare on your tax return in case you do get contacted by the Canada Revenue Agency.

For more information, Moneysense has a great list of 8 rules related to the Principal Residence Exemption.

If this is too complicated for you, there is always addy, real estate crowdfunding in Canada, which you can invest with as little as $1.

You might also be interested in:

If you disposed of a principal residence before 2017 in Canada, did you keep any record at all of the proceeds of disposition?

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8 thoughts on “Principal Residence Exemption: How to Calculate the ACB”

    • @Tom- For the principal residence? Interesting, because why is Canada’s RE so inflated then compared to most of the US?

      Reply
  1. Great article covering the key concepts. When I used to work at the Big Accounting Firm, calculating ACB was always a pressing issue for our clients and trying to minimize taxes. Especially for those that had multiple properties and at times the nature of the residence would change from personal use to investment property. Some of these scenarios can get complicated, fast.

    Reply
    • @DG Capital- Yes, so complicated. It almost makes you think twice about changing personal use to investment property or even renting out a suite of your home/ laneway house!

      Reply
  2. Not sure this matters since you don’t pay taxes anyway, but when calculating the ACB, does any major reno costs need to be considered in the calculation somehow?

    Reply
    • @moneyhelp- No, the proceeds of disposition is reported in the calculation which is just the sale price, real estate commission, and legal fees etc. However, you should document the major reno costs (capital improvements) just in case they ask.

      “Document your capital improvements and upgrades, how much you spent, the year you completed the upgrade, and other updates that can be documented with the year that it was completed”

      Reply

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