Selling Your Principal Residence in Quebec: Reporting It on Both Returns

You sold the house or condo you lived in this year, and you know the gain is tax-free. There is still a step many sellers miss: reporting the sale and designating the property as your principal residence. Quebec residents file two income tax returns, one with the Canada Revenue Agency and one with Revenu Québec, and the designation has to be made on both. Without it, the exemption is not secured and a penalty can apply. This article covers the process and the forms. The substantive rules of the exemption are covered in our article on the principal residence exemption.

Tax-free does not mean unreported

The principal residence exemption reduces or eliminates the capital gain on a sale. It is not automatic. It is a choice the taxpayer makes by designating the property in the tax return for the year of the sale.

Starting with the 2016 tax year, the Canada Revenue Agency (CRA) requires the sale of a principal residence to be reported. According to the CRA, the exemption is only allowed if the sale and the designation are reported on your return. In Quebec, Revenu Québec asks for the same step on its own form.

Federal return: Schedule 3 and Form T2091(IND)

On the federal return for the year of the sale, the sale is reported on Schedule 3, which covers capital gains and losses. The designation is made on Form T2091(IND), used to designate a property as a principal residence.

If the property was your principal residence for every year you owned it, or for all but one, the CRA says you only need to complete page 1 of Form T2091(IND). If some years are not designated, for example because you lived elsewhere for a time, the full form is used to calculate the taxable part of the gain.

Quebec return: Form TP-274-V and Schedule G

Revenu Québec has its own form: TP-274-V, Designation of Property as a Principal Residence. According to Revenu Québec, you complete it, check box 109 in Part A of Schedule G, and enclose both the form and the schedule with your return for the year of the sale.

Revenu Québec also states that the years designated for Quebec purposes must be the same as those designated with the CRA, and that you must keep proof of the federal designation. The two designations should be prepared together.

Forgetting the designation: what it costs

If you sold without reporting the sale or designating the property, the CRA says it is very important to ask for your return for that year to be amended. The CRA may accept a late designation in certain circumstances, but a penalty may apply: the lesser of $8,000 or $100 for each complete month from the original due date of the return to the date of your request.

In Quebec, Revenu Québec states that failing to file Form TP-274-V exposes you to a penalty of $100 per month, up to $5,000. Without a designation, part of the capital gain may also remain taxable.

The real cost of a missed designation depends on the file. What is certain is that fixing it means dealing with two tax authorities, while a designation made on time takes only a few lines.

The “1 +” rule and the one-property-per-year limit

The exempt part of the gain is calculated with a fraction. The top of the fraction is 1 plus the number of years the property is designated as your principal residence. The bottom is the number of years you owned it. According to the CRA, the “1 +” is what lets you cover the year in which you sell one home and buy another.

The designation is also subject to two limits:

• One property per year. Only one principal residence can be designated for a given year.
• One property per family unit since 1982. For 1982 and later years, no other property may have been designated for the same year by a member of your family unit, which includes your spouse or common-law partner and your unmarried children under 18.

For a year to be designated, the property must also have been ordinarily inhabited during that year by you, your spouse or common-law partner, your former spouse or partner, or your child. These limits are why someone who owns both a house and a cottage has to choose, year by year, which one to designate.

Before you file for the year of the sale

Gather the documents that feed both forms:

• the purchase deed and the deed of sale, both signed before a Quebec notary, for dates and amounts;
• a list of the years the property was lived in, and by whom;
• where relevant, any other property you or your spouse owned during the same years;
• a copy of the federal designation, kept with the Quebec designation.

If someone prepares your returns, tell them about the sale from the start: a sale you believe has no tax consequence is exactly the one people forget to mention. For a mixed situation, such as years of renting, a home office or a large lot, a tax professional can check the calculation before you file.