Can a Newcomer or Non-Resident Claim the Home Exemption in Canada?

Moving to Canada, or leaving it, changes how the home exemption works. Years spent outside Canada can shrink the exempt portion of a gain, and a home bought before arrival or after departure raises its own questions.

This article explains the general rules on residency and the exemption, including the plus-one year. Every residency history is different, so a lawyer or accountant should review yours.

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

How residency fits into the exemption

The exemption is worked out with a formula: the exempt portion is A minus (A x B/C) minus D, where A is the gain otherwise determined. B is one plus the number of years ending after acquisition for which the property is designated, and C is the number of years ending after acquisition in which you owned it.

Residency enters through B. Where the owner was non-resident in the year of acquisition, B counts only years of Canadian residence. A non-resident generally cannot use the exemption for non-resident years.

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

The plus-one year and its limit

If a home was your principal residence for all years owned except one, the extra year in B means the whole gain is exempt. The CRA explains this as letting you designate the sold home for the year of sale when you also bought another home that year.

There is an exception. The plus-one year is not available if you were not a Canadian resident in the year you bought the new property. So an emigrant who buys abroad, or a newcomer who buys a second property before becoming resident, cannot count on that extra year.

Newcomers: homes bought before or after arrival

For a newcomer, the main risk is that earlier years of ownership sit in C but cannot be designated, which lowers the exempt fraction. The formula counts only years of Canadian residence in B where the owner was non-resident at acquisition.

A foreign property can be a principal residence if you are resident in Canada in the year and designate it. Only one property per family unit can be designated for each year from 1982 onward, so a home abroad and a home in Canada compete for the same years.

If you were not a Canadian resident for the whole time you owned the designated property, the CRA directs you to call 1-800-959-8281.

Years in which the property was vacant land count in C but not in B, so they reduce the exempt fraction. If you bought land first and built later, that can matter to your calculation.

Emigrants and homes kept in Canada

If you leave Canada but keep your home and rent it out, a subsection 45(2) election lets you avoid a deemed disposition on the change in use. It allows you to designate the home as your principal residence for up to four years while it earns income, but only if you do not designate another property and remain a Canadian resident.

Without the election, a change in use such as home to rental is a deemed disposition at fair market value and an immediate reacquisition at the same amount, which becomes the new cost base. The election is made by attaching a signed letter to the return for the year of the change, describing the property and citing subsection 45(2).

The election is not available if capital cost allowance was claimed on the property after 1984 and on or before the change in use. The four-year limit can be extended indefinitely under section 54.1 in certain employer-relocation cases.

What to do next

• Write down the date you became or stopped being a Canadian resident.
• List the date you bought each property and where it is located.
• Note any years the home was rented and whether capital cost allowance was ever claimed.
• Keep purchase, sale and improvement records for every property.
• Get advice before you sell, since the designation is reported on Schedule 3 and Form T2091(IND).

If you forget to designate in the year of sale, you can ask the CRA to amend the return for that year, and a penalty may apply. How this applies to a mixed residency history depends on your situation, so it is worth confirming with a lawyer or accountant.

Frequently asked questions