Designating Principal Residence Years

Some Canadian taxpayers automatically assume that their current residence will be exempt from capital gains tax when they sell it or when they pass away. Their facts and circumstances may be simple enough for that to be a valid assumption, but many Canadians own or have owned more than one property in their lifetime.

As an example, a couple concurrently owns two residences: one in the city, one in the country. They think they can sell their city home tax-free, move into their country home in retirement, and then sometime in the future sell the country home tax-free or not incur any taxable capital gains if they hold the property upon death. That conclusion is incorrect. The key word is “concurrently” in that scenario.

It is important to remember that a taxpayer/couple/family unit can choose only one property as their principal residence (PR) for each calendar year for the purposes of excluding the capital gain from Canadian taxable income. Once they have used a particular calendar year for their PR designation, it is not available for any other property. While one property benefits from the exemption, another property owned at the same time may accrue a capital gains tax liability.

The formula for the principal residence (PR) capital gains exemption is: capital gain X the eligible number of years designated as PR plus one year / the number of years owned.


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