But why report if the gain on your home is not taxable? Like anything tax, it's complicated.
First reason - you have to.
Second reason - it may not always be a tax free gain, for a number of reasons. What if your cottage grew in value faster? You might want to designate that as your principle residence for the exemption. In that case, you would want to have the cost base of your home, the gain on sale of which would be taxable, as high as possible. This means keeping track of the purchase cost, legal fees, land transfer fees, and additions to the home like the cost of putting in that pool, that deck, that landscaping, paving the driveway... all those things over the decades you owned it that add up to thousands of dollars.
For this reason, I recommend that homeowners start a file to keep all these bills and receipts in case CRA ever wants you to prove it when you make your capital gains calculation.
There are other reasons the gain on sale of your home may be taxable, and it may have nothing to do wiith what you had planned.
Here's a good story, told to me by a colleague. A professional couple, divorcing after many years. They owned a house and a cottage together. The RRSPs, cars, and other assets split pretty much evenly. She wanted the house, he took the cottage - same approximate value.
But in the negotiations, he highlights that the cottage gain will be taxable when he eventually sells it but the house will not. They agree on a tax cost of $200k, and so an equalization payment of $100k is transferred from her to him and they go their separate ways.
He immediately sells the cottage and claims the principle residence exemption on the sale for the entire time they were married and owned their house. Completely legal. She is then precluded from using the PRE on the house and so it's gain on sale will be taxable. In this case, it resulted in a $400k imbalance in the divorce settlement and there was nothing she could do about it.
Not that it would fix the problem, but if they had kept track of all the improvements and additions to the home over the years, it would have reduced her gain on sale - a little help, but anything is better than nothing.
The lesson? Protect yourself against any eventuality. Open a file and keep it stuffed with all your home improvements.
Want more information or help with this? Email or call to speak with me personally!