Principal residence exemption (s. 40(2)(b))

An owner who sells a business with a home attached, such as a farm, meets this exemption alongside the business sale. Section 54 defines a principal residence as a housing unit, a leasehold interest in one, or a share of a co-operative housing corporation, owned in the year and meeting further conditions, including who ordinarily inhabited it or an election under subsection 45(2) or (3), subject to section 54.1. The CRA folio says the exemption is claimed under paragraph 40(2)(b).

Designation, business income and farm land

The folio says that, for a property to be a principal residence for a year, the taxpayer must designate it for that year and no other property may have been designated by the taxpayer for the year; for years after 1981, no other property may have been designated by a member of the taxpayer’s family unit either. It says a gain from a personal residence that is business income, not a capital gain, cannot be exempt under paragraph 40(2)(b); see capital gain versus business income. Where land used in a farming business the taxpayer carried on includes a principal residence, paragraph 40(2)(c) lets the gain be worked out by either of two methods the folio describes.

What to ask

• Whether the home was ordinarily inhabited by the owner, a spouse or common-law partner, a former spouse or common-law partner, or a child
• Whether the property was designated for each year claimed
• Whether part of the property was used in the business, and how the price is split

This entry covers the federal rule only. For the wider picture, see how capital gains are taxed when you sell a business.