Selling your home: reporting the principal residence exemption

Report the sale even if no tax is owing

Many people assume that a home sale covered by the principal residence exemption needs no mention on their return. That has not been the CRA’s position for some years. For 2016 and later tax years, the CRA allows the exemption only if you report the sale and designate the property as your principal residence on your income tax and benefit return for the year of the sale.

In practice, that means completing Schedule 3, Capital Gains or Losses, where you tick the box that describes how the property was used, and Form T2091(IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust). If the property was your principal residence for every year you owned it, or for every year except one, the CRA says you complete only page 1 of the form. If you sold more than one property that was once your principal residence in the same calendar year, each one gets its own Form T2091(IND). You also complete the form if you granted someone an option to buy your home or part of it.

Confirm the property qualifies and which years to designate

A house, cottage, condominium, apartment, mobile home or houseboat can qualify. The CRA’s conditions are that you own it alone or jointly, that you, your current or former spouse or common-law partner, or a child lived in it at some point in the year, and that you designate it. Land can be part of the principal residence, usually up to half a hectare (1.24 acres) unless you can show you need more to use and enjoy the home.

Since 1982, only one property can be designated as the family’s principal residence for any given year, and the family generally means you, your spouse or common-law partner and your children who are under 18 and have no spouse or partner of their own. Designating a year is a choice, not an obligation. If you owned a cottage and a house, for example, which one to designate for which years can change the tax on the second sale. That is worth modelling with an accountant before you file, not after.

If you sell one home and buy another in the same year, the CRA’s “plus 1” rule lets both properties be eligible for that year even though only one can be designated. Keep your decision in writing, because it matters when you sell the second property.

Late designation and mistakes

If you forgot to report the sale, the CRA says it is important to ask for an amendment to the return for the year of the sale. It will accept a late designation in certain circumstances, but a penalty may apply. The CRA’s page does not set out the amount, so do not rely on a figure you have seen elsewhere; ask your accountant to confirm the current position for your situation.

The practical lesson is to treat the sale as a reporting event as soon as the closing date is set. Tell your accountant before closing, not at the next filing season, and keep the closing documents together so the return can be completed accurately the first time.

When part of the home was not your principal residence

If the home was not your principal residence for every year you owned it, you must report the part of the gain tied to the undesignated years, and Form T2091(IND) is how that is calculated. A loss on a home is not claimable, because a home is personal-use property.

If you used part of the home to earn income, such as a rented suite, you generally split the selling price and the adjusted cost base between the personal and income-producing parts. The CRA accepts a split by square metres or number of rooms if it is reasonable. The gain on the income-producing part is reported on Schedule 3, and depreciation claimed earlier can also bring recapture into income. If the rental or business use is small, you make no structural changes and you claim no capital cost allowance, the CRA may still treat the whole property as a principal residence, as with a home day care.

For the rental side of this, see our guide on rental income: what you can claim.

Changes in use: moving out and renting, or moving in

When you change a property’s use, you are generally considered to have sold it at fair market value and reacquired it at the same amount, even though nothing was sold. Converting your home to a rental is the common case, and so is moving into a former rental. Any gain for years in which the property was your principal residence is not taxed, but the year of the change is a reporting year.

There are elections that can defer this. If you convert your principal residence to a rental or business property, you can elect under subsection 45(2) of the Income Tax Act not to be treated as having changed its use, by attaching a signed letter to the return for the year of the change. While the election is in effect you cannot claim capital cost allowance, and you can designate the property for up to four years even if you do not live in it, subject to conditions. If you convert a rental into your home, subsection 45(3) allows you to postpone reporting until a later sale, but not if capital cost allowance was claimed after 1984.

Because these elections have deadlines and trade-offs, discuss them before you move out or begin renting, not when you sell.

Check the flipping rule and keep your records

Under the residential property flipping rule, a gain on a housing unit in Canada that you owned for less than 365 consecutive days is deemed to be business income. It is then fully taxable and does not qualify for the capital gains treatment or the principal residence exemption, and a loss is deemed to be nil. Exceptions apply where the sale is due to, or in anticipation of, certain life events, such as a death, a relationship breakdown, a serious illness, a safety threat, an eligible relocation, an involuntary job loss, insolvency or the destruction of the property. The rule applies to sales on or after January 1, 2023. A sale outside the rule is still a question of fact as to whether it is business income or a capital gain.

Keep the purchase and sale agreements, lawyer’s statements of adjustments, receipts for renovations that add to the cost of the property, selling costs, any appraisals or assessments used for a split, and notes on who lived there and when. Records from the year of purchase are the ones most likely to be missing years later.