Principal Residence Exemption: What’s changed, what hasn’t

By Melissa Shin | October 5, 2016 | Last updated on September 21, 2023
7 min read

July 10, 2017: This article has been corrected from an earlier version that misstated the formula for calculating the PRE. We regret the error.

The Principal Residence Exemption (PRE) has long been a boon to Canadians. In essence, it allows a person to be exempt from tax on capital gains as long as they’re selling a primary home.

On Monday, the federal government tightened rules for the PRE with the intention of making the benefit available only to Canadian residents. To facilitate that, the government imposed additional tax reporting and changed parts of the Tax Act.

The changes are meant to “better ensure that the principal residence exemption is available only in appropriate cases, and in a manner consistent with the Canadian resident and one-property-per-family limits,” the Department of Finance said in its release.

Will the adjustments deter foreign ownership? Depends on how you look at it, say tax experts. Regardless, the changes have implications for all Canadian taxpayers, particularly those who put their residences in trusts.

Read: Pitfalls with the Principal Residence Exemption

What’s the PRE?

A family unit (the taxpayer, her spouse, and any unmarried minor children) is entitled to one PRE per year. Families who have two or more properties must choose which property to designate as the principal residence in a given year. While the family member must “ordinarily inhabit” the principal residence, CRA has said living in a property for “short periods” will qualify it for the PRE. (Read these articles for more on the PRE’s details and exceptions.)

Families with one home have only one principal residence, so they get the full exemption from tax on any capital gains. But people with more than one home can choose which residence to designate as principal, provided the residence qualifies. CRA has a formula to calculate the exemption to claim when selling one of those homes. This is it:*

([1 + number of years designated]/number of years owned) x gain = exemption amount

(For full details of the formula, go to the CRA website.)

Prior to October 3, 2016, the exemption would be calculated this way for all taxpayers. Further, while there is a form for designating a principal residence, CRA hasn’t required taxpayers to file it if the property was eligible for the full PRE.

What’s different now?

The formula: changed for non-residents

The formula for calculating the exemption uses the number of years designated plus one. That’s to help people who move from one principal residence to another in the same year. For instance, if a person buys a condo in June 2006, buys a house in August 2012, sells the condo in September 2012 and then sells the house in September 2016, they get to claim the full PRE on the condo from 2006 to 2012, and the full PRE on the house from 2012 to 2016.

“It’s meant to provide a full exemption on two properties in one year,” says Frank Di Pietro, assistant vice-president of tax and estate planning at Mackenzie Investments. But it’s not meant to help property flippers or speculators who buy and sell in the same year.

Thanks to Monday’s announcement, the plus-one formula is no longer available for people who were non-residents in the year they acquired the property.

For actual or deemed property sales after October 2, 2016, the PRE formula for non-residents is now (corrected as per above):

(number of years designated/number of years owned) x gain = exemption amount

Net effect

“The one-plus is a bonus for Canadian [residents],” says Di Pietro.

That’s helpful, says Keith Masterman, vice-president, Tax, Retirement and Estate Planning at CI Investments, as “not everyone who buys and sells property in the same year is a speculator.” Sometimes, people buy a house, get a new job in a different city, and have to sell.

Besides, CRA can go after Canadian-resident speculators through different mechanisms, Masterman says: by characterizing flipping proceeds as income, not capital gains, or by determining that the house was not someone’s principal residence after all.

Removing the one-plus for non-residents could deter foreign speculators, Masterman says. But if the non-resident ordinarily inhabits the home after purchase, the change only affects one year’s worth of PRE – which is relatively minor.

Read: Primary residence questions raised in Senate spending trial

Family unit: unchanged

“In the proposed tax changes, there’s nothing related to how they’re defining the family unit. As far as I’m concerned, that hasn’t changed,” says Di Pietro. So a family is still considered a taxpayer, the spouse or partner, and any minor unmarried children.

Net effect

A non-resident with a Canadian-resident spouse or child could still access the plus-one PRE calculation if the Canadian resident claims the PRE.

Reporting obligations: changed

For tax years that end after October 2, 2016, CRA will now require taxpayers to fill out additional reporting when they claim the PRE.

“The taxpayer will be required to provide basic information in the taxpayer’s income tax return for that year in order to claim the exemption,” says the Department of Finance. “In addition, the CRA will be explicitly authorized to accept late-filed principal residence designations.”

It’s unclear if CRA will use existing forms or create a new one for the disclosure. Currently, the PRE form is Form T2091, and taxpayers must disclose disposal of capital property on Schedule 3 of the T1 tax return.

Regardless, Di Pietro suspects CRA will ask “when you bought, when you sold and what years you’re claiming the PRE.” Audits will likely increase, he adds.

Net effect

The reporting change is “far overdue,” says Di Pietro. Since CRA hadn’t required you to file Form T2091 when claiming the PRE for the entire time you owned the home, it was difficult for the agency to track PRE abuses. Theoretically, tax evaders – Canadian resident or otherwise — could have sold multiple properties with overlapping ownership periods and reported nothing to CRA, thereby over-claiming the PRE and paying no capital gains taxes.

Now, CRA “will be able to identify which taxpayers have claimed PREs for what years,” says Di Pietro. For someone who tries to double dip on the exemption, “they’ll have a record of you already claiming the PRE on another property,” he says, and CRA could more easily reassess the taxpayer.

Read: Come clean with CRA

Trust ownership: changed

Prior to Monday, many personal trusts were entitled to claim the PRE, as long as the beneficiaries “ordinarily inhabited” the home. “Under the new rules, the only trusts that will be eligible [for the PRE] are alter ego, spousal or common-law partner, joint spousal/partner, and qualified disability trusts [QDT], and trusts for minor children of a deceased parent,” says Di Pietro. “The intent appears to be to ensure the PRE is available to family members defined within the family unit.”

The trust’s beneficiary who occupies the residence must be a resident of Canada for the trust to be eligible for the PRE. And, “in the case of a QDT, the beneficiary must also be spouse, partner (or former spouse/partner) or child of the trust’s settlor, and must occupy the home as a principal residence,” adds Di Pietro.

Net effect

Masterman says these new rules could curtail reasonable planning. For instance, discretionary trusts meant to protect overspending children won’t be entitled to the PRE. So, if a parent wants to put a primary residence in trust for a spendthrift adult child, the trust will be taxed on any capital gains when the residence is sold.

While QDTs are entitled to the PRE, a QDT can only be created for a person who receives the Disability Tax Credit (DTC). Yet it’s not uncommon for people with disabilities to be ineligible for the DTC. Under the new rules, trusts for adult disabled children who do not qualify for the DTC, as well as Henson trusts, will not be eligible for the PRE.

“The spirit [of the rules] is we want to make sure you’re looking after your family and not using [the trust] for speculative purposes,” Masterman says. “But it seems strange that they’re going to distinguish between a beneficiary who qualifies for the federal Disability Tax Credit and one who does not. And if I have a family member with a need that is not a disabled need, not a minor [child] need, or not a spousal need, why do those needs mean something less?”

Read: Help clients understand Qualified Disability Trusts

For clients who were going to put their residences in a trust, Masterman suggests thinking about where the supposed beneficiary is going to live. “Maybe there’s an opportunity to say, ‘From now on my trust will have to rent a property for them.’ ” Another option is to consider selling the house prior to death or bequeathing it, as opposed to putting it in a trust.

As for the effects on non-residents, Di Pietro says the new rules “[will] make it more difficult for non-residents to access the PRE through the use of a trust structure.” That’s because while it’s possible for a non-resident to settle a Canadian-resident trust, “the cases where this would work are now extremely limited. For example, in the case of an alter ego trust, the settlor, trustee and beneficiary are the same person, so it would be impossible for a non-resident to access the PRE.”

In short, while the political motivation of Monday’s announcements was to stymie foreign real estate buyers, the changes affect all Canadians, says Di Pietro. “[They’re] designed to be further reaching than [to] just non-residents. Canadians need to be aware of these rules.”

*A previous version of this story misstated the formula for calculating the PRE. Return to the corrected sentence.

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Melissa Shin

Melissa is the editorial director of and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at You may also call or text 416-847-8038 to provide a confidential tip.