If I sold a portion of the property of my principal residence to a neighbor. Added to his principal residence. Are the proceeds taxable?

[Heidi123]

When you sell your primary residence, you typically do not have to pay capital gains tax, due to the principal residence exemption.

However, to claim a principal residence exemption, you are required to prove you live in the dwelling and make sure you fill out Schedule 3 when you file your tax return. Please follow the following steps:

• Prove primary residence in Canada:

Proving your primary residence in Canada involves demonstrating to the Canada Revenue Agency (CRA) that a particular property is your main dwelling. To do this, you’ll need to provide evidence that shows consistent and substantial ties to the residence in question.

In order to show the property is your principal residence, you’ll need to provide documentation that:

• lists your address
• demonstrates that you’ve lived at this location for some time during the year (even a short duration may be acceptable).

The documents can include your driver’s license, provincial or territorial health-care card, and vehicle registration, all of which should feature your current address.

Utility bills, property tax receipts, and insurance documents for the home can also designate that it’s your principal residence. Further, records of your day-to-day life, such as employment records, school enrollment documents for children, or even a history of local purchases, can reinforce the designation.

You don’t need to submit these details with your tax return, but you’ll need to have them handy in case the CRA asks to see them.

• Report the sale of your principal residence:

Every sale of a principal residence must be reported on your income tax return to claim the exemption. Here’s how to do it:

• Gather your documents. Before you start, make sure you have all the necessary documents, including the purchase and sale documents that show the value of your property. Other documents include copies of your identification, any bills that show your address, and Form T2091, the form where you calculate the exemption.
• Fill out Schedule 3. This form is part of your tax return and is specifically for reporting capital gains or losses. Schedule 3 calculates the amount of capital gain you have when you enter the purchase and sale values for your property. You’ll also need to include the date you purchased the property.
• Make the principal residence designation. If the property was your principal residence for every year you owned it, indicate this on Schedule 3 by ticking the appropriate box on page 2 of the schedule. This step is crucial for the exemption.
• Calculate the exemption. If you’re eligible, the capital gains tax will be reduced or eliminated based on the number of years the property was your principal residence.

More information about completing Schedule 3 for real estate can be found on the CRA website.

For more detailed information on principal residence exemption, please read our article What Is the Principal Residence Exemption and How Does It Work?

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