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Newsletter Page 3 - Toronto Certified General Accountant
Newsletter #10 December 2010
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Personal Income Tax (Cont'd)
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The Principal Residence Exemption (Cont'd)
- For 1982 and subsequent years, each family unit (which includes you, your spouse or common-law partner, and any unmarried children under the age of 18) has been able to designate just one property as its principal residence for each year
- This designation is done at the time when an actual sale of the residence or deemed disposition of the residence at death is reported
- A designation form T2091 should be filed with the tax return in the year of disposition, but the Canada Revenue Agency does not require the form to be filed unless there is a taxable capital gain after applying the exempt portion according to the designation rules
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Generalizing that there is no capital gains tax on the sale of principal residences may be inaccurate.
There may be a capital gain but it can be exempted, wholly or partially, by designating the
home as the taxpayer’s principal residence for certain specific years. Below is an example using
the principal residence exemption formula.
The exempt portion of a gain on the disposition of a principal residence is calculated by:
1 + number of years designated (after 1971)/number of years owned(after 1971) x gain
The ”1+” in the numerator of the fraction was intended to protect one housing unit in a situation
where a family sells one house and buys another in the same year. For example, it’s possible to own
two properties at the same time for a period up to one year and still sell both properties tax free.
Consider the scenario in which you purchased a house in 1968 and sold it in 2007, and you
purchased a cottage in 2005 and sold it in 2010. Here is a situation where you own more than one
residence for the years 2005 to 2007, and can designate only one of them for a given year as the
principal residence. Say the house was sold for a gain equal to appreciation of the house since 1968.
The gain, however, is calculated using the fair value of the house on December 31, 1971 as the cost
of the house (not the actual cost in 1968), because there was no capital gains tax before 1972.
The number of years you own the house (after 1971) is 36 years, from 1972 to 2007, therefore the
denominator is 36 in the principal residence exemption formula to calculate the exempt portion of
the gain on the house.
The number of years you own the cottage (after 1971) is 6 years, from 2005 to 2010, therefore the
denominator is 6 in the principal residence exemption formula to calculate the exempt portion of the
gain on the cottage.
Options for the numerator in the principal residence exemption formula for this scenario are
discussed below:
Option 1
The house can be designated as the principal residence for the years 1972 to 2004 or 33 years
(numerator highlighted in (1) below). The cottage would then be designated as the principal
residence from 2005 (the year of purchase) to 2010 or 6 years (numerator highlighted in (2) below).
The denominator (as discussed previously) which represents the number of years the residence is
owned is 36 for the house, and 6 for the cottage, and does not change in all the options discussed
below.
- 1+ 33/36 = 34/36 x gain on house is exempt portion of gain on house
- 1+6/6 = 7/6 x gain on cottage is exempt portion of gain on cottage
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