The Canada Revenue Agency (CRA) exempts the entire capital gain or a portion from the sale of a principal residence from taxes, if it qualifies. However, based on the current updated Principal Residence Exemption (PRE) regulations, it is mandatory to file forms, such as: Form T2091, Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust) to claim this exemption.

The following is a brief overview of Form T2091 which is used to claim the principal residence exemption.

Form T2091, Designation of a Property as a Principal Residence by an Individual

(Excluding Personal Trusts)

The principal residence exemption is an income tax benefit that generally provides an exemption from tax on the capital gain realized when a taxpayer sells a property that is his/her principal residence.

Generally, the exemption applies for each year the property is designated as your principal residence. If the property is considered a principal residence for the entire period of ownership, the designation can be made on Schedule 3.

Canadians need to file Form T2091, however, when selling their principal residence during a year if the property was not their principal residence for every year he/she owned it (e.g., a different property, such as a cottage, was designated as the principal residence for one of the years during the same period of ownership).

The form is used to designate a residence as a ‘principal residence’ in order to claim the ‘principal residence exemption’ and determine the exemption amount.

The calculation of the principal residence exemption is based on the following formula:

Principal Residence Exemption Amount = A × (B ÷ C)

  • A is the taxpayer’s gain
  • B is 1 + the number of tax years ending after the acquisition date for which the property is designated as the taxpayer’s principal residence and during which he or she was resident in Canada. (Note that both these conditions must be satisfied for a particular year in order for that year to qualify for inclusion in variable B.)
  • C is the number of tax years ending after the acquisition date during which the taxpayer owned the property (whether jointly with another person or otherwise)

The extra year in B (1 + ) allows for both the old home and the new home treated as a principal residence in the year of a move, even though only one of them can actually be designated as such for that year.

For dispositions occurring after October 3, 2016, the “1 +” factor only applies if the taxpayer was resident in Canada during the year in which they acquired the property.

Why is it important to file Form T2091?

Earlier, the PRE was easy to claim. The seller of the Canadian principal residence did not need to report the capital gain from the sale on the Canadian individual income tax return. However, this lead to many individuals claiming the ‘principal residence exemption’ multiple times, and it also became difficult for the CRA to monitor and prevent these situations.

Therefore, in order to avoid individuals from misusing this exemption, it is absolutely necessary to file Form T2091 to claim the PRE in a tax-compliant manner.

When does Form T2091 need to be filed?

Form T2091 is required to be filed only if the principal residence exemption does not completely eliminate the capital gain. Form T2091 must be filed with the taxpayer’s income tax return for the year in which the property is disposed of or the year in which the taxpayer grants an option to acquire the property, whichever is earlier. The PRE cannot be claimed if the Form T2091 is not filed on a timely basis.

The completed Form T2091 should be attached to the annual income tax return.

That being said, tax situations can be complex, and can also prove to be expensive if not managed in the right manner. Always consult a tax professional when it comes to income or capital gains tax to strategize the sale in a tax friendly manner and minimize the tax burden, if possible along with being fully tax compliant.

 

Additional Canada Real Estate Property Related Articles:

15% Property Transfer Tax for Foreigners Buying Property in Vancouver

Tax on Rental Income Earned by Non-Resident Property Owner in Canada

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