Canada’s principal residence tax exemption isn’t an easy loophole to get out of paying capital gains tax.

Selling the property that is your principal residence at a profit, is tax free in Canada. The principal residence exemption is an income tax benefit that allows you to be exempt from the capital gain tax when you sell your principal residence.

To claim it, you must live in your home as your principal residence for at least 2 years before you sell.

However, some people try to use this exemption on taxes even when flipping houses.

One individual went to court recently who flipped three different houses in six years and paid none of the profits in tax in this time. He reported only a $20,000 income as a realtor when he sold properties for millions. The Canada Revenue Agency (CRA) is looking closely at people who try to use loopholes to get out of paying taxes – an act that is immoral and illegal.

The taxpayer didn’t report any profit gains from selling these properties. He assumed it would quality as principal residence however, the judge ruled that the profit he made from flipping these houses was made as income. The taxpayer, however, “did not ordinarily inhabit any of the three homes for any period of time.”

Even vacation properties and seasonal residences, can be considered ‘ordinarily inhabited’ and be tax free on disposal but on the condition that the main reason of ownership is not to produce income.

A combination of this taxpayers low declared income as a realtor, combined with the succession of houses he demolished and then turned for profit, would suggest he did not ordinarily inhabit these houses. Therefore, they and should have reported it as capital gains income and paid his taxes.

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