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Wendy Seet

Tax Principal at Manning Elliott Burnaby
by Wendy Seet
January 17, 2023

Changes to the CRA Principal Residence Rules Since 2016


The Canadian principal residence rules have changed since 2016.

That’s when the Department of Finance introduced new rules with respect to the principal residence exemption (“PRE”) to “improve tax fairness by closing the loopholes”.

Refer to our previous blogs about general PRE tax issues and various deemed disposition events

The following provides an overview of the main changes to the principal resident rules in Canada since 2016:

1. Additional T1 Reporting Requirements
The Income Tax Act has always required the sale of a principal residence to be reported for income tax purposes. However, the CRA had an administration position that did not require individuals to do so if the gain was fully sheltered by the PRE. 

Beginning in the 2016 taxation year, the tax rules changed so that all dispositions of real property (whether a principal residence is taxable or not) must be reported or the CRA can reassess the return regardless of when the disposition occurred.

This change effectively nullified the CRA’s administrative position and extended the normal statute-barred period1.

The normal statute-barred period will only begin when tax returns are filed (on time or late) or amended to report these dispositions.

If a principal residence designation is filed late, the CRA could either deny it resulting in a fully taxable sale or assess a late-filing penalty at the lesser of $8,000 or $100 per month.

Individuals should share details with their financial and legal advisors about any personal-use property to ensure compliance with tax reporting. This includes:

  • Recent sales and purchases
  • Recent and past renovations
  • Their residency status during the ownership period
  • Whether there are multiple properties owned

This will ensure that personal tax returns are not exposed to an indefinite reassessment period.

2. Trusts That Can Shelter the Gain on A Principal Residence
The new principal residence rules also limit the PRE to the following types of trusts:

  • Alter ego trusts, joint spousal2  trusts, spousal trusts, or trusts for the benefit of the settlor during their lifetime. Depending on the type of trust, the beneficiary in respect of whom the PRE exemption is claimed must be the settlor or a spouse of the settlor.
  • A testamentary3 trust that is a qualified disability trust, settled by a parent or spouse of the beneficiary.
  • An intervivos3  trust for the benefit of a person eligible for the disability tax credit.

Legislation was finally drafted on August 9, 2022 to include this trust, in response to the Department of Finance’s September 4, 2019 comfort letter. However, it has not yet been passed into law at the time of writing.

  • A trust for the benefit of an orphaned minor child, settled by a parent or as a consequence of a parent’s death.

In all cases, the beneficiary must be a Canadian resident for the years that the PRE exemption is claimed.

Some examples of trusts that would not be eligible to claim the PRE include:
–    Intervivos trusts set up solely to hold a principal residence
–    Family trusts
–    Qualified disability trusts settled by a grandparent, uncle, or aunt 

The gain on dispositions by non-qualifying trusts will be calculated using two time periods:

  1. Up to after December 31, 2016, in which the PRE exemption is available if all the other criteria are met, and 
  2. Beginning January 1, 2017, in which the PRE exemption is not available.

The gain in the first time period involves a notional disposition at fair market value on December 31, 2016. No guidance has been provided with respect to the determination of this value and we would recommend at a minimum, retaining a copy of the property tax assessment to support the 2016 value until the property is sold.

A non-qualifying trust can “roll” a principal residence to a beneficiary on a tax-deferred basis. For the purpose of making the principal residence designation, the beneficiary may consider the years that the trust owned the property as if they owned the property. Note that this tax-deferred option may accelerate the application of the property transfer tax.

3. Eliminating the “1+” Real Estate rule for Non-residents
The PRE calculation includes a “1+” factor to recognize that taxpayers may buy a new home and sell an existing home in the same year.

This allows a taxpayer to claim the PRE exemption on both homes with respect to that same year, despite the CRA principal residence rule that only one principal residence may be designated for a calendar year.

For properties disposed of after October 3, 2016, the “1+” factor will only be available to a taxpayer who was resident in Canada in the year the principal residence was purchased. This prevents non-residents from benefitting from 1 year of the PRE exemption as the “1+” factor did not previously have a residency requirement.

If you still have questions about the Principal Residence Exemption, please contact a member of the Manning Elliott Tax Team today by submitting a contact form inquiry.


1Generally, 3 years for individuals and 4 years for corporations.
 2Reference to spousal/spouse includes common-law partner
 3For clarity, an intervivos trust is set up while the settlor is alive (whereas a testamentary trust is provided for in a person’s will and set up upon their death).

The above content is believed to be accurate as of the date of posting. Canadian Tax laws are complex and are subject to frequent changes. Professional tax advice should be sought before implementing any tax planning. Manning Elliott LLP cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.