Guide to T2091 for Designating a Principal Residence

Buying a home is a major milestone for newcomers in Canada. When the time comes to sell that home, you may owe capital gains tax on any increase in value, unless you can designate it as your principal residence using Form T2091. The principal residence exemption is one of the most valuable tax benefits available to Canadian homeowners, and understanding how it works can save you tens of thousands of dollars.

What Is the Principal Residence Exemption?

In Canada, when you sell a property for more than you paid for it, the profit is called a capital gain. Normally, 50% of a capital gain is added to your income and taxed. However, if the property was your principal residence, some or all of the gain can be exempt from tax.

The exemption formula is:

Exempt portion = Capital Gain x (1 + number of years designated) / number of years owned

The "1 +" in the formula provides an extra year of coverage, which is especially helpful if you owned two properties briefly during a transition period (for example, buying a new home before selling the old one).

What Qualifies as a Principal Residence?

To qualify, the property must meet these criteria:

• It is a housing unit (house, condo, apartment, cottage, mobile home, or houseboat)
• You, your spouse, your common-law partner, or your child ordinarily inhabited it during the year
• You designate it as your principal residence for that year
• Only one property per family unit can be designated per year

The land on which the home sits can also qualify, up to half a hectare (about 1.25 acres). If the lot is larger, the excess land does not qualify unless you can demonstrate it was necessary for the use and enjoyment of the home.

When to File T2091

You file Form T2091 (or T2091(IND) for individuals) in the year you sell or are considered to have sold your principal residence. Since 2016, you must report the sale of your principal residence on Schedule 3 (Capital Gains) of your tax return, even if the entire gain is exempt. Failure to report can result in penalties.

You file T2091 when:

• You sell your home
• You have a deemed disposition (for example, if you change the use of your property from personal to rental, or if you leave Canada and become a non-resident)
• You transfer the property to a spouse or to a trust

Step-by-Step: Completing Form T2091

Section 1: Property Information

1. Enter the address of the property you are designating
2. Enter the date you acquired the property and the date you sold it (or the deemed disposition date)
3. Enter the proceeds of sale (the selling price) and the adjusted cost base (typically what you paid, plus certain costs like legal fees on purchase and capital improvements)

Section 2: Calculate the Capital Gain

1. Subtract the adjusted cost base and selling expenses from the proceeds of sale
2. The result is your capital gain (or capital loss, though losses on principal residences are not deductible)

Section 3: Designate Years

1. List the years for which you are designating this property as your principal residence
2. You can only designate years during which you (or your family) ordinarily inhabited the property
3. If you owned the property for all the years you are designating, and you have no other property to designate, simply designate all years of ownership

Section 4: Calculate the Exempt Portion

1. Apply the formula: Capital Gain x (1 + years designated) / years owned
2. If you designate all years of ownership, the entire gain is usually exempt (thanks to the 1+ in the formula)
3. Report any taxable portion on Schedule 3 of your T1 return

Special Considerations for Newcomers

Buying Your First Canadian Home

When you buy your first home in Canada, start keeping records immediately. Save the purchase agreement, legal invoices, land transfer tax receipts, and receipts for any major renovations. These documents establish your adjusted cost base and will be needed when you eventually sell.

Deemed Acquisition on Arrival

If you owned a property outside Canada before immigrating, and that property became your home in Canada, the CRA may consider you to have acquired it at fair market value on the date you became a Canadian resident. This is called a deemed acquisition. Keep records of the property's value on your arrival date.

Non-Resident Years

If you left Canada and became a non-resident, you may have a deemed disposition of your property. If you later return, you may have a deemed acquisition. These events can complicate the principal residence designation, so consider consulting a tax professional. Visit the CRA's principal residence page for detailed rules.

Change of Use

If you convert your home to a rental property (or vice versa), the CRA treats this as a deemed sale at fair market value. You may need to file T2091 at that point. However, you can elect under subsection 45(2) of the Income Tax Act to defer the deemed disposition for up to four years. This election must be made in your tax return for the year of the change of use.

Common Mistakes

• Not reporting the sale at all: Since 2016, even fully exempt sales must be reported on Schedule 3. The CRA can deny the exemption if you fail to report on time, though they may grant a late designation with a penalty.
• Designating two properties in the same year: Only one property per family unit per year. If you and your spouse each own a property, only one can be designated for any given year.
• Forgetting about the "plus one" rule: The formula adds one extra year, which means a brief overlap between properties (buying before selling) is usually covered.
• Not keeping renovation receipts: Capital improvements increase your adjusted cost base and reduce your capital gain. Keep all receipts for major work (additions, kitchen renovations, new roof) but not for routine maintenance.

Filing the Form

Form T2091 is filed with your T1 income tax return for the year of sale. If you file electronically, most tax software will walk you through the designation questions and generate the form automatically. If you file on paper, attach the completed T2091 to your return.

For related information, see our guides on applying for a GST/HST number, Schedule 8 CPP contributions, and RC381 inter-provincial transfers.

You can download Form T2091 directly from the CRA forms page.

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