Changes to principal residence rules

Global Publication October 2016

On October 3, 2016, the Minister of Finance tabled a Notice of Ways and Means Motion to amend the principal residence exemption rules in the Income Tax Act (Canada). These amendments not only, as advertised, restrict the ability of non-residents to claim the principal residence exemption, but also restrict the ability of certain trusts to do so, and eliminate the Canada Revenue Agency’s policy of not requiring taxpayers to report dispositions of principal residences in certain circumstances.

The “one-plus” rule

The “one-plus” rule, which is designed to allow a taxpayer to claim the principal residence exemption on both the house he/she sells in a year and the house he/she buys in the same year, will be amended to preclude a taxpayer who is not a resident of Canada during the year in which he/she buys a house from using that rule to claim the house as a principal residence in that year.


In order for a house to qualify as a trust’s principal residence for a taxation year that begins after 2016 the trust will have to be an eligible trust. Only inter vivos or testamentary spousal or common-law partner trusts, alter ego trusts, joint spousal or common-law partner trusts, certain pre-1972 spousal trusts, self-benefit trusts, qualified disability trusts, and certain trusts (inter vivos or testamentary) the settlor of which died before the start of the year might qualify as eligible trusts. Many family trusts which hold personal residences will not qualify.

Reporting the disposition of a principal residence

In the past, the Canada Revenue Agency (“CRA”) has not required a taxpayer to report the disposition of a house regarding which the principal residence exemption is claimed sufficiently to fully negate the gain on the sale of the house. However, the CRA announced that this is no longer the case. For sales of houses on or after January 1, 2016, 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. Failure to report the sale and designate the house as a principal residence will result in denial of the principal residence exemption. Thankfully, the CRA will be authorized to accept late-filed principal residence designations.

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