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We recently moved to a larger home in Nova Scotia Canada and now we own two houses. Our old home is currently empty and we will either rent it out or sell it. If we sold our old house, we would probably get $40,000 more for it than we paid a decade ago. I understand that we would not owe capital gains tax on the appreciation because it was our primary residence for many years.

What if we were to rent the house to tenants for a few months or a few years before selling it? Would we still be exempt from capital gains tax?

Or would renting the house, even for a few months, cost us thousands of dollars in taxes?
 

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Your capital gains exemption would be in proportion to the number of years it was your principle residence divided by the number of years owned. Read Chapter 6 of CRA T4037, IT120, and form T2091. So you would only owe capital gains on a portion of the gain.

PS. if you only rented it for a few months you probably wouldn't owe any capital gains, because the actual formula is (No. of years as principal residence + 1)/ (No. of years owned)

PPS. IT120 probably gives the clearest explanation of the calculation. Form T2091, which is the form you file when reporting the proceeds of the sale, is quite convoluted.
 

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Thank you, OhGreatGuru, for your reply!

I looked at the forms you refereed to. It sounds like it will make no difference to capital gains taxes if we rent our our our old house or leave it empty. To totally avoid capital gains taxes we would need to sell it within the first year.
 

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How about in the case where I own a home for say 5 years, but decide (for whatever reason) to live in a rented apartment (separate place) without selling my existing house or renting the house out to others.

Can I still claim principal residence exemption on the house or do I actually have to be living there? Based on what I read in the IT Bulletin you provided, I am leaning towards yes contingent on the specific definition of "ordinarily inhabited" (i.e. I live there 1 day per year, I store my things there).
 

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You can elect to have your old home, now used for renting purposes, considered to be your principal residence for up to 4 years. This is possible under ITA 45(2), and the additional stipulation is that you can't deduct any CCA for your house.
 

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Non - Resident

I am in a similar situation, I understand that renting out the house would not forefit the capital gains. To complicate things I will be moving oversees and likely becoming a non-resident of Canada for tax purposes, which means I means I will have been deemed to have disposed of my properties when emigrating. Question - when/if I sold the house in 5 years, would I now be taxed on the Capital Gains for the property (up until the point of emigration)?
 
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