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Perhaps the biggest tax break remaining for ordinary Canadians is the principal residence exemption (PRE), which allows individuals to realize an unlimited tax-free gain upon the sale of their home. Contrast that to the U.S. where the exemption is currently limited to US$250,000 for single filers (US$500,000 for married couples filing jointly), although last month, a bill was introduced in the U.S. that would provide an unlimited exemption just like in Canada.

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Under our tax rules, if you do sell your principal residence, as of 2016 you need to report that sale on your tax return even if it fully qualifies for the PRE. The designation of your principal residence is reported on the front page of Schedule 3 of your return, and you must also complete the appropriate sections of Form T2091(IND), Designation of a Property as a Principal Residence by an Individual.

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For a property to qualify as your principal residence for a particular tax year, four criteria must be satisfied: 1. the property must be a housing unit; 2. you must own the property (either alone or jointly with someone else); 3. you or your spouse (or common-law partner) or kids must “ordinarily inhabit” the property and 4. you must “designate” the property as a principal residence.

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Note that a seasonal residence, such as a cottage, cabin, lake house or even ski chalet, can be considered to be “ordinarily inhabited in the year” even if you only use it during vacation periods “provided that the main reason for owning the property is not to gain or produce income.”

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A rental property, however, is generally not considered a principal residence, and you could be on the hook for capital gains tax when you sell it. Similarly, you may be precluded from claiming the PRE if you bought or built a home with the purpose of selling it for a profit.

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In recent years the government has been cracking down on residential house flipping. New anti-flipping rules for residential real estate (including rental properties) came into effect Jan. 1, 2023, and were designed to “reduce speculative demand in the marketplace and help to cool excessive price growth.”

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The rules prevent you from claiming the PRE to shelter the capital gain realized on the sale of your home if you’ve owned it for less than 12 months. And, any gain on the sale of residential real estate held under 12 months is taxable not as a 50 per cent capital gain, but rather as 100 per cent taxable business income, subject to certain exemptions for life events such as death, disability, separation and work relocation.

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If you sold residential real estate (including a rental property) that you owned for less than 365 days, you are obligated to declare that sale on Part 2 of the Schedule 3 of your personal tax return for the year of sale.

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And, although the flipped property rules only came into play for 2023 and future years, the Canada Revenue Agency can still challenge real estate flips that took place prior to 2023 if it feels a taxpayer has speculated and flipped a property for a quick profit.