Principal Residence Exemption When Selling After Leaving Canada

Is the gain on my house tax-free after I move out of Canada?

Only for the years you were resident in Canada. The exempt part of the gain is a fraction: 1 (only if you were resident in Canada the year you bought) + the years the home is designated as your principal residence while you were resident in Canada, divided by every year you owned it (Income Tax Act 40(2)(b)). The rest is a capital gain, and 50% of it is taxable. You report that taxable part on line 12700 of a non-resident return for the year of sale, due April 30 of the next year for most people (Income Tax Act 150(1)(d)), and pay federal tax on it plus the surtax for non-residents (T4058).

The test is residence, not citizenship. A Canadian citizen living abroad gets no exempt years for the time abroad, unless deemed resident in Canada (Folio ¶2.50).

Your case is not simple if:

• You rented the home after leaving (a deemed sale may have happened on the day renting began).
• You and a spouse own it together and left on different dates.
• You now live in a country that also taxes the sale, such as the US.
• Rent was earned and never reported, or no one valued the home when renting started.

Gather: your cost and improvement receipts, proof of your departure date, the date renting began and the home's value then, and any designation already filed (details in the records list below).

How does the "one plus" formula work when some years were abroad?

Count calendar years. The top of the fraction is the years the home was your principal residence and you were resident in Canada at any time in that year, plus one bonus year. The bottom is every year you owned it, including the years abroad and the year of sale (section 40).

• "During" the year means at any time in it. The year you left counts as a resident year, as long as you lived in the home that year (Folio S1-F3-C2, ¶2.21).
• The bonus year needs residence in the year you bought. If you were not resident in Canada in the year you acquired the home, there is no "plus one" (Folio ¶2.20).
• A year also needs a designation. The home must have been ordinarily inhabited that year by you, your spouse or common-law partner, or your child, and you can designate only one home per family unit per year (section 54).

Does it matter whether I left the house empty or rented it?

Yes. An empty home has no change in use, so the formula simply runs from purchase to sale. Leaving Canada is not itself a sale of the home: Canadian real estate is left out of the departure deemed sale, so your cost stays what you paid (Income Tax Act 128.1(4)(b)). A home you started renting is treated as sold at its fair market value on the day renting began, and bought back at that value (Income Tax Act 45(1)). The CRA expects the resulting gain, and the designation that shelters it, to be reported for the year the use changed (CRA).

If renting began in the year you left, every ownership year up to then may be a resident year, so the exemption may cover the whole gain to that date. Any rise in value after renting began is usually not covered, because years abroad cannot be designated. Whether the year renting began can also shelter part of it is not settled in the CRA's guidance, so have the designation checked. Whether this works for you depends on your exact dates, so confirm when you stopped being resident; see the date you became a non-resident.

Rent earned while abroad has its own withholding and filing rules: see non-resident landlords.

Does a 45(2) election add exempt years while I live abroad?

No. A 45(2) election cancels the deemed sale when renting begins. You make it with a signed letter filed with your return for the year renting began, so you need a Canadian return for that year even if you had already left (Income Tax Act 45(2); Folio ¶2.48). It also lets you designate the home for up to four years without living in it. Those years count only if you were resident, or deemed resident, in Canada during them (Folio ¶2.50; section 54).

So for someone who has left, the election mainly changes the shape of the calculation:

Which route leaves less gain taxable depends on how the value moved before and after you left. Claiming capital cost allowance while relying on the election is a common trap: the CRA treats the election as rescinded from the first day of the year the allowance is claimed (Folio ¶2.48 and ¶2.51). For a missed or late election, see home turned rental: election and later sale.

I never made the election: what is my cost now?

Your cost is the home's fair market value on the day renting began, because the deemed sale reset it (section 45). Your capital gain on the real sale is generally the sale price, less that value and less selling costs and later improvements; 50% of it is taxable.

You need a supportable value for that date. An appraisal or a comparable-sales report from around then helps; one prepared now, looking back, is weaker but better than none. If the deemed sale was never reported, the designation for it is late, and a late designation can carry a penalty of $100 per complete month, up to $8,000; see principal residence exemption.

Which forms show the exemption on a non-resident sale?

Three filings, in this order (T4058; IC72-17R6):

On T2091(IND), the CRA says to leave out every year you were not resident in Canada (IC72-17R6, ¶73). If you were not resident in Canada for the whole time you owned the home, the CRA asks you to call it at 1-800-959-8281 about the designation (CRA). The notice, holdback and certificate steps are covered in non-residents selling Canadian property.

Can the exemption reduce the certificate payment?

It can. The certificate payment is 25% of the sale price over your cost, ignoring selling costs, but the CRA says the tax or security may be reduced where the principal residence exemption reduces the gain. Send Form T2091(IND) with the T2062 to claim it (IC72-17R6, ¶41 and ¶73). The return for the year of sale settles the final tax, and any excess paid is refunded after assessment. For money the buyer's lawyer is holding, see buyer held back your sale proceeds.

We owned it together and left on different dates: how are our years counted?

Each owner works out a separate gain on their own share (Folio ¶2.27), and each counts only the years they were resident in Canada (section 40). The spouse who stayed longer may get one or more extra exempt years.

The family unit can still designate only one home per year (Folio ¶2.13). If the family also owned a cottage, both homes cannot be designated for the same year; see cottage or second home when leaving Canada.

What records prove when I lived there and when I left?

Keep records that tie dates to the home and to Canada:

• Purchase documents, closing statement and improvement receipts (your cost).
• Utility bills, driver's licence and mail at the address (the years you lived there).
• Your departure return, travel records, and your lease or job contract abroad (your departure date).
• The first rental lease, and a valuation near the day renting began.
• Any T2091(IND) or 45(2) election letter you filed before.

Example

These examples are illustrative, in Canadian dollars, and ignore selling costs.

Left empty, sold four years later

• Year 1: bought for C$500,000.
• Years 1 to 8: lived there; left Canada in year 8. Home stays empty.
• Year 12: sold for C$900,000 while living abroad. Gain C$400,000.
• Exempt share: (1 + 8) / 12 of C$400,000 = C$300,000.
• Gain not covered: C$100,000, of which half, C$50,000, is included in income (the taxable capital gain).
• Certificate payment without the exemption: 25% of C$400,000 = C$100,000. With T2091(IND) sent with the T2062, the CRA may base it on the C$100,000 not covered: about C$25,000.

Rented right after leaving, no election

• Year 1: bought for C$500,000; lived there through year 8 and left that year.
• Year 8: renting began; deemed sale at C$800,000. Every ownership year was a resident year, so the C$300,000 gain may be fully exempt, if designated and reported that year.
• Year 12: sold for C$900,000. New cost C$800,000, so a C$100,000 gain, likely not exempt because years 9 to 12 were abroad; C$50,000 included in income if none is exempt.

Couple who left a year apart

• Year 1: spouses bought jointly, half each, for C$600,000.
• Year 6: one spouse moved abroad. Year 7: the other followed. Home left empty.
• Year 10: sold for C$1,000,000. Each spouse's gain is C$200,000.
• First spouse: (1 + 6) / 10 exempt = C$140,000; C$60,000 not covered, of which C$30,000 is included in income.
• Second spouse: (1 + 7) / 10 exempt = C$160,000; C$40,000 not covered, of which C$20,000 is included in income.
• Neither can designate another home for years 1 to 7.

Different for you?

• You rented the home and never reported the deemed sale, the rent or both: unreported years may affect the sale and bring a late designation; get individual tax help.
• You already sold and sent no CRA notice, designation or return: late filings can carry penalties and cost exemption years; get individual tax help and see non-residents selling Canadian property.
• You and a spouse left on different dates, or no one valued the home when renting began: each owner's count and the change-date value need working out before the T2062 goes in; get individual tax help.
• You missed or filed a late 45(2) election, or claimed capital cost allowance: see home turned rental: election and later sale.
• You now live in the US: the US may tax the same gain; see selling your Canadian home after moving to the US and cross-border tax help.
• You have not left yet and are deciding whether to sell: see keep or sell your home when leaving Canada.
• The home is in Québec: Québec has its own designation form and rules for non-resident sellers; see non-residents selling Canadian property and principal residence exemption.
• Your departure date is unclear or disputed: see the date you became a non-resident and get individual tax help.
• The buyer is holding back money: see non-residents selling Canadian property.