Chapter History S1-F3-C2, Principal Residence


The purpose of a Chapter History page is to highlight any amendments to the information contained in a chapter of an income tax folio, including amendments to the information originally contained in an interpretation bulletin that has been cancelled and replaced with a folio chapter. It outlines amendments that have been made as a result of legislative changes and proposed legislative changes, precedential court decisions, as well as new or revised interpretations of the Canada Revenue Agency (CRA).

Except as otherwise noted, all statutory references herein are references to provisions of the Income Tax Act, R.S.C., 1985, c.1 (5th Supp.), as amended and all references to a Regulation are to the Income Tax Regulations, C.R.C., c. 945, as amended.

Update July 25, 2019

¶2.6 has been amended to remove the reference to cancelled Income Tax Info Sheet TI-001, Sale of a Residence by an Owner Builder.

¶2.15 has been amended to refer to the forms required for a designation of a property as a principal residence after 2016.

¶2.15.1 has been added to confirm that the Minister of National Revenue may accept a late-filed principal residence designation for tax years that end after October 2, 2016. This is in accordance with a legislative amendment to paragraph 220(3.21)(a.1) made by S.C. 2017, c.33, s.76 (formerly Bill C‑63).

¶2.15.2 has been renumbered as a result of the insertion of new ¶2.15.1. The first sentence has been revised for additional clarity. It formerly read, “For dispositions that occurred prior to 2016, the CRA did not require reporting of a full principal residence exemption.” It now reads, “For sales or dispositions that occurred prior to 2016, the CRA did not require reporting on the taxpayer’s income tax return where a full principal residence exemption otherwise applied to that disposition.”

¶2.20 has been amended based on the description of B in paragraph 40(2)(b), for dispositions that occur after October 2, 2016. This reflects a legislative amendment made by S.C. 2017, c. 33, subsection 10(1), (formerly Bill C‑63). The amendment requires a taxpayer to be resident in Canada in the year a principal residence is purchased in order to be eligible for the “plus 1” rule when calculating the gain from its disposition.

¶2.35 has been amended to replace the term “area” used in the last sentence with “portion” for clarity purposes.

¶2.65 has been amended to refer to the additional rules applicable when a personal trust disposes of a principal residence after 2016.

¶2.66.1 to 2.66.4 have been added to reflect legislative changes to subsections 40(6) and 40(6.1), and subparagraph (c.1)(iii.1) of the definition of principal residence within section 54. See 2017, Chapter 33 (Bill C‑63); Budget Implementation Act, 2017, No. 2 [assented to December 14, 2017]. These rules identify which categories of trust can make a designation and confirm that the trust may do so only if certain conditions are met. Example 7.1 has been added to demonstrate the operation of these rules.

The Reference section has been updated to include paragraph 220(3.21)(a.1).

In addition, revisions have been made to the French version of the Chapter for readability and consistency purposes.

Update March 22, 2017

¶2.60 has been revised to refer to and reflect the publication of Income Tax Folio S4-F2-C2, Business Use of Home Expenses, which replaced and cancelled Interpretation Bulletin IT-514, Work Space in Home Expenses.

Update December 1, 2016

The Summary has been updated to notify readers of an important change in the CRA’s reporting requirements commencing in 2016. The change is applicable to all dispositions of principal residences otherwise qualifying for the full principal residence exemption. It also notifies readers of other proposed legislative changes introduced by Finance Canada in a Notice of Ways and Means Motion dated October 3, 2016.

The following specific changes have been made to the Chapter:

¶2.15 and ¶2.16 have been amended to describe the changes to the CRA’s administrative reporting requirements for all dispositions of a principal residence that otherwise qualifies for the full principal residence exemption. These changes are effective for dispositions taking place in 2016 and onward.

¶2.72 has been amended to refer to transfers in tax years prior to 2016 as a consequence of the change discussed in ¶2.15 and ¶2.16.

Update November 24, 2015

Minor changes have been made to improve the usability of the income tax folios:

Update February 3, 2015

The following change has been made to the Chapter.

¶2.47 is revised to replace the reference to “qualified farm property” with a reference to “qualified farm or fishing property”, to reflect legislative amendments made by S.C. 2014, c.39, (formerly Bill C-43), s. 30(1) and (3), which repealed the defined terms “qualified farm property” and “qualified fishing property” and enacted a new defined term, “qualified farm or fishing property”. These amendments are applicable to dispositions and transfers that occur in the 2014 and subsequent tax years.

Update November 14, 2014

The following changes have been made to the Chapter.

¶2.11 was amended in several respects. These revisions were made to clarify the wording in the paragraph and to clarify that a housing unit may still qualify as a taxpayer’s principal residence even if the main reason for owning the property is to gain or produce income as long as it is ordinarily inhabited by one of the persons described in paragraph (a) of the definition of principal residence in section 54. Specifically:

Update April 9, 2014

Throughout the French version of the Chapter and its Chapter History, general revisions have been made to improve readability. The following changes have also been made to the Chapter.

¶2.9 was amended to change the phrase “legal owner or beneficial owner” to “owner (including a beneficial owner)”. This revision better reflects the most common type of ownership, where legal title and beneficial ownership are united in one person. The revised wording also considers concepts under civil law. The common law examples were removed. Wording was added to direct the reader to the paragraphs discussing ownership issues in the province of Quebec.

¶2.11 was amended to include the following at the end of the paragraph: “As of July 2005, a housing unit owned by a taxpayer that is ordinarily inhabited by the taxpayer or by the taxpayer’s spouse, common-law partner, former spouse, former common-law partner or child could be designated as a principal residence that was ordinarily inhabited in the year.” This addition better reflects the new rules in effect as of July 2005.

¶2.22 was amended to reflect a bijural amendment from S.C. 2013, c. 34, s. 102 (formerly Bill C-48). The proposed legislative change text box was removed following the enactment of S.C. 2013, c. 34, s. 102 (formerly Bill C-48).

¶2.73 was amended to specify in the second sentence that the principal residence exemption is available to an individual who is a member of a partnership.

¶2.79 was amended to correspond with ¶2.9 and to reflect bijuralism.

¶2.80 was revised to limit the comments to common law and to remove the heading since it is not required because it is evident within the paragraph.

¶2.83 was amended to allow the heading to more accurately describe the content. Text was inserted to reflect the preamble of subsection 248(3).

¶2.84 was amended to align the content with the wording in subsection 248(3). The intent of the revision was to differentiate between “the right as a lessee” and “the right as a lessee under an emphyteusis”.

¶2.89 was amended to reflect bijuralism.

¶2.90 was amended to remove the reference to “beneficially or legally” for consistency with ¶2.9.

Update March 28, 2013


Income Tax Folio S1-F3-C2, Principal Residence replaces and cancels Interpretation Bulletin IT-120R6, Principal Residence, and Interpretation Bulletin IT-437R, Ownership of Property (Principal Residence).

In addition to consolidating the content of the former interpretation bulletins, general revisions have been made to improve readability. Any substantive technical and interpretive changes to the information outlined in the former interpretation bulletins are described below.

Legislative and other changes

¶2.6 was added to introduce the concepts described in more detail in Income Tax Info Sheet TI-001, Sale of a Residence by an Owner Builder, and Interpretation Bulletin IT-218R, Profits, capital gains and losses from the sale of real estate, including farmland and inherited land and conversion of real estate from capital property to inventory and vice versa.

¶2.35 (formerly addressed in ¶16-17 of IT-120) has been changed to note the CRA’s general acceptance of the Federal Court of Appeal decision in Cassidy v Canada, 2011 FCA 271, 2011 DTC 5160.

¶2.86 is a shortened version of ¶8 of IT-437R to more appropriately reflect the law in the Province of Quebec.

¶7 of IT-437R was removed in full since it no longer appropriately reflects the law in Quebec.

¶14 of IT-437R was removed in full since the CRA changed its administrative position with respect to the tax treatment of leasing arrangements and on June 14, 2001, the CRA issued Income Tax Technical News No. 21, and officially cancelled Interpretation Bulletin IT-233R. The CRA’s new position contrasts with the previous economic substance over form approach, and now restricts the characterization question to examining the legal relationship created between the parties to a lease, rather than attempting to arrive at the economic results of the arrangement.

As stated in Income Tax Technical News No. 21, it is now the CRA’s view that the determination of whether a contract is a lease or a sale is based on the legal relationships created by the terms of the particular agreement, rather than on any attempt to ascertain the underlying economic reality. Therefore, in the absence of a sham, a lease is a lease and a sale is a sale.

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