Form T2091(IND) Step by Step: Designating Your Principal Residence in Canada

You sold a home and you have heard that the sale is tax-free. That is often true, but it is not automatic. The CRA expects you to report the sale and make the designation on your return, and the forms can feel unfamiliar the first time you meet them.

This article walks through Schedule 3 and Form T2091(IND) in the order you will usually meet them. Your facts may change the answer, so treat this as a guide to how the process generally works.

This article covers Canadian federal tax law, which applies in every province.

Do you have to report the sale at all?

Yes. Since the 2016 tax year, the sale (or deemed sale) of a principal residence must be reported on Schedule 3 of your T1 return, even if there is no gain or the whole gain is exempt. The CRA allows the exemption only if the disposition and the designation are both reported.

Individuals (other than personal trusts) designate the property and calculate any gain on Form T2091(IND). Only page 1 needs completing if the property was your principal residence for all years you owned it, or all years except one.

Before you start, confirm the home qualifies. It must be a housing unit you own, alone or jointly, and it must be ordinarily inhabited in the year by you, a spouse or common-law partner, a former spouse or partner, or a child.

Step 1: Gather the figures you need

Most of the work is collecting numbers. Your adjusted cost base is generally the cost of the property plus expenses to acquire it, such as commissions and legal fees, plus capital expenditures such as additions and improvements; current expenses such as maintenance and repairs cannot be added. Your outlays and expenses of the sale are selling costs such as legal fees, transfer taxes and advertising.

• The date you bought the home and the date you sold it
• Your purchase statement and receipts for acquisition costs
• Records of additions and improvements
• The sale statement showing the proceeds and your selling costs
• A list of any other properties owned by your family unit in each year

Step 2: Schedule 3, designation and sale

On Schedule 3, the designation is made in Part 1 by ticking box 1 at line 17900 if the home was your principal residence for all years you owned it, or all but one. You tick box 3 at line 17900 if it was not your residence for every year you owned it. Part 2 reports the sale itself.

A gain on an income-producing portion goes on line 13800, and if you sold more than one property in a year, the gain per property is reported on line 15800. Line numbers can change from year to year, so check the current form as you go.

Step 3: Years designated and the resulting gain

The capital gain is your proceeds of disposition minus your adjusted cost base and the outlays and expenses of the sale. The exempt portion of the gain is set by a formula in the Income Tax Act that compares the years the home is designated with the years you owned it. In that comparison, B is one plus the number of years ending after you acquired the property for which it is designated, and C is the number of years ending after acquisition in which you owned it. Form T2091(IND) walks you through the calculation, and an accountant or lawyer can confirm the result for your situation.

The extra year in B is the "plus one" year. If the home was your principal residence for all years owned except one, the whole gain is exempt. The CRA explains it as letting you designate the sold home for the year of sale when you also bought another home that year. It is not available if you were not a Canadian resident in the year you bought the new property.

• Only one property per family unit can be designated for each year from 1982 onward.
• For 1993 and later years, your family unit is you, your spouse or common-law partner and your unmarried children under 18.
• A spouse or common-law partner separated for the whole year under a court order or written separation agreement is not in the same family unit for that year.
• Years in which the property was vacant land count in C but not in B, so they reduce the exempt fraction.

If part of the gain is not exempt, half of the capital gain is taxable and goes on line 12700. A home is personal-use property, so if you have a loss on the sale you cannot claim it.

Situations that change the form

• Rental or business use: a change in use is generally a deemed disposition at fair market value. A subsection 45(2) election can avoid it, and you can designate the home for up to four years while it earns income if you designate no other property and remain a Canadian resident. The election is not available if capital cost allowance was claimed after 1984 and on or before the change in use.
• Flipped homes: a gain on a home owned less than 365 consecutive days before sale is deemed business income, so the exemption does not apply, subject to listed exceptions such as death, illness or an eligible relocation.
• Death: the executor must designate the home on the final return using Schedule 3 and Form T1255, even if the gain is fully exempt.

These situations can change both the form and the result, so a lawyer or accountant can confirm how they apply to you.

What to do next

• Confirm the home qualifies and which years you can designate
• Collect your cost, improvement and selling-cost records
• Complete page 1 of Form T2091(IND) if the home qualifies for all years or all but one
• Report the sale and designation on Schedule 3 of your T1 return
• If you forgot to designate, ask the CRA to amend the return for the year of sale
• Get advice if the home was ever rented, shared, flipped or owned by a trust

If you missed the designation, the CRA may accept a late designation in certain circumstances, but a penalty may apply. The Act sets the late-election penalty at the lesser of $8,000 and $100 multiplied by the number of complete months between the due date and the date of the application.

Frequently asked questions