The Principal Residence Exemption (PRE) is dependent on designating a qualifying property as a Principal Residence (PR) on a year-by-year basis. It is computed in the year of sale as the gain, multiplied by the ratio of the number of years the home is designated as a PR, plus one, over the number of years the house was owned.

The designation is made by filing form T2091. However, under the CRA's long-standing position, the form is not required when the gain is completely exempt. When the form is not filed, it's assumed the PRE has completely eliminated the gain.

Prior to 1982, each individual could designate a property as a PR, but the designation has since been restricted to one residence per family unit per year. So if a family has owned more than one home continuously since before 1982, it can shelter the gain on more than one property, at least in part.

Generally, the PRE formula assumes gains accrued evenly during ownership. However, to keep pre-1982 gains exempt, an alternate calculation is used for homes purchased before that year. The alternate calculation computes the gain separately for the pre-1982 and post-1981 periods.

Here's an example. As part of their retirement plan, Gail and Edward sell their cottage this year and plan to downsize from their large city home to a condo within the next two years (See chart: Principal Decision). They purchased the city home (their first house) in 1973 for $104,000. At the end of 1981, it was valued at $210,000 and has now jumped to $640,000. Gail inherited the couple's cottage in 1976 when it was worth $61,000. It was valued at $150,000 at the end of 1981 and was recently sold for $350,000.

Gail and Edward can each designate a property as a PR for the pre-1982 years, so the home would get at least nine years and the cottage at least six years of exemption. For the years after 1981, the gain per year on the home is significantly greater than the gain per year on the cottage, so it makes sense to save the PR designation for the post-1981 years for their city home. In addition, because the post-1981 gain per year is higher than the pre-1982 period for the home, the alternate method will not be used on the home. Therefore, for the home, all years but one can be designated as PR to fully protect the gain. This leaves one year of designation for the post-1981 period for the cottage (See chart: Calculation Option).

Yours truly,

Tactical Asset Management, Inc.
phone: (306) 757-2121
fax: (306) 347-3655
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