How Long Do You Have to Live in a Property to Avoid Capital Gains Tax in Canada? (2024)

FAQs

How Long Do You Have to Live in a Property to Avoid Capital Gains Tax in Canada? ›

There is no rule laid out by the Canada Revenue Agency (CRA) about exactly how long you must own your primary residence in order to take advantage of the principal residence exemption, which says that you don't have to pay capital gains on the profit on your home as long as it is your primary residence.

Profits on the sale of residential property are fully taxable as business income, not capital gains, and no principal residence exemption will be allowed, for residential property owned for less than 12 months. The property flipping rule applies to properties sold on or after January 1, 2023.

How long do I have to live in my rental property to avoid capital gains in Canada? To minimize capital gains tax in Canada, you must designate the property as your principal residence for each year you own it. The number of years that you can claim the principal residence exemption is limited to four years.

For properties inherited by heirs other than a spouse, the estate can claim the PRE for the years the deceased owned and used the property as their principal residence, potentially reducing or eliminating capital gains tax up to death.

Lifetime capital gains exemption limit

For dispositions of qualified small business corporation shares in 2023, the lifetime capital gains exemption (LCGE) limit has increased to $971,190.

A property should never be transferred to a family member for sale proceeds that are less than the fair market value (“FMV”) of the property. Doing so would trigger double taxation, where both the transferor and the recipient can be taxed on the same growth.

The amount of the Lifetime Capital Gains Exemption (LCGE) is $1,016,836 in 2024 and is indexed to inflation. Budget 2024 proposes to increase the LCGE to apply to up to $1.25 million of eligible capital gains. This measure would apply to dispositions that occur on or after June 25, 2024.

Usually, a property stops being your main residence when you stop living in it. However, for CGT purposes you can continue treating a property as your main residence: for up to 6 years if you used it to produce income, such as rent (sometimes called the '6-year rule')

The seller must have owned the home and used it as their principal residence for two out of the last five years (up to the date of closing). The two years do not have to be consecutive to qualify. The seller must not have sold a home in the last two years and claimed the capital gains tax exclusion.

How to avoid capital gains on primary residence? ›

You can avoid capital gains tax when you sell your primary residence by buying another house and using the 121 home sale exclusion. In addition, the 1031 like-kind exchange allows investors to defer taxes when they reinvest the proceeds from the sale of an investment property into another investment property.

Think twice about property as a gift

From a financial standpoint, it is usually better for your heirs to inherit real estate than to receive it as a gift from a living benefactor.

Tax Implications

If the property is a principal residence, it might be exempt from capital gains tax. Keep in mind that there is no gift tax in Canada. However, other tax implications like capital gains tax still stand. Also, inheritance as a form of transfer might have implications for estate taxes.

Generally, in Canada, anyone who receives a gift or inheritance will not have to include this in their income. For tax purposes, the inherited property has a cost base equal to its value at death. Any subsequent income earned or gains realized will need to be included when you file your Canadian tax return.

A few options to legally avoid paying capital gains tax on investment property include buying your property with a retirement account, converting the property from an investment property to a primary residence, utilizing tax harvesting, and using Section 1031 of the IRS code for deferring taxes.

Capital gains generally do not apply to some types of personal-use property, such as cars and boats, whose value tends to decrease over time. They also don't apply to the property you live in—your principal residence. Capital gains are taxable in Canada.

Generally, capital gains are not subject to non-resident withholding tax. However, where the property you dispose of is taxable Canadian property (TCP), Canadian non-resident withholding tax may apply. Examples of TCP include Canadian real estate, Canadian resource property and Canadian timber resource property.