Can Spouses Each Claim a Different Home as a Principal Residence in Canada?

Many couples own more than one home, such as a house in the city and a cottage. When one of them is sold, a common worry is whether the gain will be taxed, and whether each spouse can shelter a different property.

The federal rule is built around the "family unit", not around each person. This article explains who is in your family unit, the exceptions, how years can be split between two homes, how co-owners fit in, and how the designation is reported. Your facts may differ, so a lawyer or accountant can confirm how this applies to you.

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

The one-home-per-family-unit rule

Only one property per family unit can be designated as a principal residence for each year from 1982 onward. The designation is made year by year, so the question is always which single property shelters a given year.

For 1993 and later years, your family unit is you, your spouse or common-law partner, and your unmarried children under 18. That means a married or common-law couple cannot normally designate two different homes for the same year.

Exceptions to who is in the family unit

• A spouse or common-law partner who was separated for the whole year under a court order or written separation agreement is not in the same family unit for that year, so each can designate a different home.
• An unmarried person under 18 with no spouse, partner or child has a family unit that also includes their parents and unmarried siblings under 18.

Separation in fact, without a court order or written agreement covering the whole year, does not fit this exception as the rule is described, so it is worth getting advice if your situation is unclear.

How the rule changed over time

This history matters if you owned homes for many years, because each year is looked at under the rule that applied then.

Splitting years between a house and a cottage

Spouses may split years between two homes by designating each home for different years, as long as no year is designated for two properties. A home can be designated only for a year in which it was a housing unit ordinarily inhabited in that year by you or your spouse or common-law partner, former spouse or partner, or child. Even a short period of occupation in the year can be enough, but where the main reason for owning a property is to earn income, a brief occupancy generally will not qualify. If no qualifying person ordinarily inhabited a property in a year, for example because it was rented or vacant, it may still be treated as the principal residence for that year through a subsection 45(2) or 45(3) election, which turns on the facts. For example, a couple might designate the cottage for years in which the family ordinarily inhabited it and the house for the others.

The "plus one" rule helps in the year of a move. When a home is sold and another bought in the same year, both are treated as principal residences for that year. In the formula for the exempt portion, the extra year in B is why a home that was the principal residence for all years owned except one can have its whole gain exempt.

The plus-one year is not available if you were not a Canadian resident in the year you bought the new property. Years in which the property was vacant land count toward the years owned but not toward the designated years, which reduces the exempt fraction.

Co-owners and reporting the designation

Co-ownership counts as ownership, including joint tenancy and tenancy-in-common. Each co-owner reports their own share on their own return and designates the property separately, and each can designate only if no other property is designated for their family unit that year.

A co-owner who does not live in the home, such as an adult child on title for a parent, cannot designate it unless the unit was ordinarily inhabited in the year by that co-owner or their spouse or partner, former spouse or partner, or child.

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, and CRA allows the exemption only if the sale and designation are reported. Individuals designate the property and calculate any gain on Form T2091(IND), and only page 1 needs completing if the property was the principal residence for all years owned, or all but one. On Schedule 3, the designation is made in Part 1 by ticking box 1 at line 17900 (principal residence for all years owned, or all but one) or box 3 at line 17900 (not the residence for every year owned), but line numbers may be renumbered from year to year, so check the current form.

What to do next

• List every property your family unit has owned and the years each was owned.
• Note who was in your family unit each year, including any separation under a court order or written agreement.
• Decide, with advice, which years to designate for which property so no year is used twice.
• Gather purchase and sale dates for the plus-one year.
• Report the sale on Schedule 3 and complete Form T2091(IND) with your return.

If you forgot to designate in the year of sale, ask CRA to amend that year's return. CRA may accept a late designation, but a penalty may apply. Where the late-election penalty applies under the Income Tax Act, it is the lesser of $8,000 and $100 multiplied by the number of complete months between the due date and the date of the application. The Minister may also waive or cancel penalties or interest if the request is made within ten calendar years after the tax year ends. A lawyer or accountant can help you work out the best designation.

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