Selling a Home Abroad While Living in Canada: Capital Gains, Foreign Tax Credits and the Principal Residence Question

Canada does not ask where the home is. It asks who was living in it, and in which years. Here is how the answer changes depending on whether your overseas home sat empty, was rented out, housed your parents, or housed you.

Ask four people who moved to Canada while still owning a home back where they came from what that home is for now, and you will usually get four different answers. One keeps it empty and stays there on trips back. One rents it out. One has parents living in it. One spent a stretch of a year living there again after landing here.

When it comes time to sell, those four people can end up with four very different Canadian tax pictures, even if the homes are similar in value. The Income Tax Act does not care much about where the home is. It cares about who ordinarily lived in it, in which years, and whether you were a Canadian resident in those years.

I’m Arthur Zhao, a real estate broker in Toronto. I’m not an accountant, and nothing here is tax advice. What I can do is lay out what the Act and the CRA’s own guidance actually say for each of these four situations, so the conversation with your accountant starts from the right place. The tax rules of the country where the home sits are a separate matter; they are not covered here, and you need someone qualified there to confirm them.

Why the use of the home matters more than its location

The Income Tax Act’s definition of principal residence in section 54 has no requirement that the home be in Canada. What it does require, for an individual, is that the housing unit was “ordinarily inhabited in the year by the taxpayer, by the taxpayer’s spouse or common-law partner or former spouse or common-law partner or by a child of the taxpayer” (para. (a)), and that you designate it in prescribed form (para. (c)).

According to the CRA’s Income Tax Folio S1-F3-C2 (2024), “A property that is located outside Canada can, depending on the facts of the case, qualify as a taxpayer’s principal residence,” and a Canadian resident who owns such a property “can designate the property as a principal residence for that year” (¶2.74).

Two limits shape everything that follows:

• Only resident years count. In the exemption formula in s. 40(2)(b), the years that reduce your gain are years for which the home is your principal residence and during which you were resident in Canada.
• One designation per family, per year. Under s. 54(c), a home cannot be your principal residence for a year if another property was designated for that year by you, by your spouse or common-law partner (unless you were living apart under a judicial separation or written separation agreement throughout the year), or by your child under 18 who was unmarried and not in a common-law partnership. If you also own a home in Canada, the two are competing for the same years.

With those two limits in mind, the four situations play out quite differently.

Situation 1: The home sits empty and you stay there when you visit

Can it be designated? Possibly. The CRA says whether a home is “ordinarily inhabited” is decided on the facts of each case, and that “Even if a person inhabits a housing unit only for a short period of time in the year, this is sufficient for the housing unit to be considered ordinarily inhabited in the year by that person” (Folio S1-F3-C2, ¶2.11). So regular stays on trips back are the kind of fact that can support a designation. The catch is the one-per-family-per-year rule: any year you designate the overseas home is a year your Canadian home cannot be designated by you, your spouse or partner, or a minor child.

T1135? Form T1135 is for specified foreign property, which includes tangible property situated outside Canada (s. 233.3(1), para. (b)). But the same definition excludes “personal-use property” (para. (p)). A home kept primarily for your own personal use or enjoyment fits the Act’s definition of personal-use property in s. 54, so on these facts it would generally fall outside the T1135 count.

At sale: you calculate the gain from your reset cost (see the shared rules below). Any year you choose to designate, and were resident in Canada, reduces it through the s. 40(2)(b) formula. The years you leave undesignated do not.

Situation 2: The home is rented out

Can it be designated? This is where it gets hard. The CRA’s view in Folio S1-F3-C2, ¶2.11 is that “If the main reason for owning a housing unit is to gain or produce income then that housing unit will not generally be considered to be ordinarily inhabited in the year by the taxpayer where it is only inhabited for a short period of time in the year.” A few weeks’ stay between tenancies will not usually carry a home that is mainly an investment. The same paragraph notes that someone receiving only incidental rental income is not considered to own the home mainly to earn income, so a mostly personal home with occasional rent is a different conversation.

T1135? A rental home is not personal-use property, so it is specified foreign property. You must file Form T1135 for any year in which the total cost amount of all your specified foreign property exceeded $100,000 at any time (s. 233.3(1), definition of “reporting entity”), by your filing-due date for the year (s. 233.3(3)(b)). Note that the test is built on cost amount, a cost-based figure, not today’s market value. The rent itself is a separate, annual income question that is outside the scope of this article.

At sale: expect the gain since your reset cost to be taxable, with the foreign tax credit (below) as the main offset, rather than the principal residence exemption.

Situation 3: Your parents or other relatives live there

This is the situation where the two sets of rules point in different directions, and it surprises people.

Can it be designated? Look again at the list in s. 54, para. (a): you, your spouse or common-law partner, a former spouse or partner, or your child. Parents are not on it, and neither are siblings or other relatives. Their living in the home, on its own, does not make it ordinarily inhabited for this purpose. (The CRA does carve out one family case in ¶2.11, and it goes the other way: a home rented to your child who also ordinarily inhabits it can still be designated, provided the other conditions are met.) If you, your spouse or your child also stayed there in a given year, the short-stay principle from Situation 1 may come back into play, but that is a facts question for your accountant.

T1135? Here the answer can favour you. The Act’s definition of personal-use property in s. 54 covers property used primarily for the personal use or enjoyment of the taxpayer or of a person related to the taxpayer, and under s. 251(2) and (6) individuals connected by blood relationship, including a parent and child, are related. A home used primarily so your parents can live in it can therefore fall within the personal-use exclusion. If your relatives pay you rent, raise that with your accountant, because it bears on whether the home is used “primarily” for personal enjoyment.

At sale: the years your parents lived there, without you, your spouse or your child ordinarily inhabiting it, generally cannot be designated. The gain since your reset cost for those years stays in the taxable column.

Situation 4: You lived there yourself for part of a year after moving to Canada

Can it be designated? For years in which you yourself ordinarily inhabited the home and were resident in Canada, para. (a) of the definition is met by you, and the s. 40(2)(b) formula counts those years. This is the cleanest fit of the four.

Two things to check with your accountant before you rely on it:

• Were you still resident in Canada in those years? If a long stay abroad raises a question about your residency, the answer changes the formula, because non-resident years do not count. The CRA’s reporting guidance says that “If you were not a resident of Canada for the entire time you owned the designated property, contact the CRA.”
• Which home do you want the year to go to? If you also owned a home in Canada that year, only one of them can be designated by your family unit for that year.

T1135? A home you live in yourself is used for your personal use and enjoyment, so the personal-use exclusion in s. 233.3(1), para. (p) is the relevant starting point, as in Situation 1.

At sale: designated resident years reduce the gain; any other years do not.

Rules that apply however the home was used

Your starting cost is reset. When an individual becomes resident in Canada, s. 128.1(1)(b) deems them to have disposed of each property they own (with listed exceptions such as taxable Canadian property) immediately before becoming resident, and s. 128.1(1)(c) deems them to have reacquired it at that same amount, fair market value. In practice, the Canadian gain on your overseas home is generally measured from its value when you became resident, not from what you originally paid.

Every amount is converted to Canadian dollars at the rate for its own day. Section 261(2)(b) requires a foreign-currency amount to be converted using “the relevant spot rate for the day on which the particular amount arose.” My reading of that rule: your reset cost and your sale price are converted at two different days’ rates, so a change in the exchange rate between those days can move your Canadian-dollar gain up or down even if the price in local currency barely changed. Your accountant should confirm how this applies to each item, including selling costs.

Half the gain is included. Under s. 38(a), your taxable capital gain is ½ of your capital gain for the year.

Foreign tax can be credited, but only the right kind and only up to a limit. Section 126(1) lets a Canadian resident deduct “non-business-income tax” paid to another country, capped by a formula that limits the credit to the portion of your Canadian tax attributable to your income from that country. Section 126(7) defines non-business-income tax as the portion of an income or profits tax paid to that country’s government. A levy on the home or the transaction that is not a tax on income or profits does not fit that definition. Which taxes you actually paid abroad qualify is a question for your accountant, ideally with the foreign tax documents in hand.

Report it, even if you expect no tax. According to the CRA (2021), individuals report the sale of a principal residence on Schedule 3, and the designation is made on Form T2091(IND), Designation of a property as a principal residence by an individual.

The four situations side by side

Before you sign a sale agreement abroad

Grouped by who should handle each item: