Selling a Home You’ve Owned Since Before 1994: The Pre-1982 Principal Residence Rule and the 1994 Capital Gains Election

If your family has only ever had one home, the old rules change little. A second property, a 1994 election or an estate sale changes the arithmetic. Here is how to tell which situation is yours.

I’m Arthur Zhao, a real estate broker in Toronto. When a couple who bought in the 1970s or 1980s starts talking about selling, the first tax question I ask them is not what they paid. It is this: in any year since you bought, did anyone in the family own a second place? A cottage, a condo bought for a parent, a house kept as a rental after you moved.

If the answer is no, the age of the ownership mostly changes the paperwork, not the tax. If the answer is yes, two dates in the Income Tax Act, the end of 1981 and February 22, 1994, start to matter, and they matter differently depending on who owned what and when. So instead of starting from the formula, this article starts from your situation. Find the one that describes your family and read that part. I am not a tax advisor; what follows is general information drawn from the Act and the CRA’s guide, and your accountant is the person who should run the numbers for your file.

Situation 1: one home, lived in every year

This is the most common case and the simplest. The principal residence exemption works by dividing the gain into an exempt share and a taxable share. The exempt share is based on one plus the number of years the home is designated as your principal residence, over the number of years you owned it (Income Tax Act s.40(2)(b)). Designate every year and the exempt share is larger than the whole, so no part of the gain is taxable. The extra “one” is there so that a family that buys a new home and sells the old one in the same year is not penalized for overlapping ownership.

If you bought before 1972, the count does not reach back to the purchase date. The Act starts it from the later of December 31, 1971 and the day you acquired the home, so the years counted are those ending after that date.

What does not change with age is the requirement to report. According to the CRA’s guide Capital Gains – 2025 (T4037), you report the sale and designate the property on Schedule 3, and complete Form T2091(IND); if the home was your principal residence for every year you owned it, or every year but one, only page 1 of that form is needed.

Situation 2: before 1982, each spouse owned a property

Picture a couple who, in the late 1970s, had a house in the city in one spouse’s name and a cottage in the other’s. For years before 1982, the designation rule looked only at the individual: a property qualified as long as the taxpayer had not designated another one for that year (s.54, definition of “principal residence”, para.(c)(i)). Each spouse could therefore designate the property they owned, and both properties could be covered for the same pre-1982 years. Each property still had to be ordinarily inhabited by the owner, a spouse or a child in that year (para.(a)).

From 1982 on, the rule switched to the family unit. For any year after 1981, the designation fails if a spouse or an unmarried minor child has designated another property for that year (para.(c)(ii)). The CRA guide puts it plainly: for 1982 and later years, a family can designate only one housing unit per year, while for years before 1982 more than one housing unit per family could be designated.

Because the rule changed partway through the ownership, the Act caps the taxable gain on a property owned at the end of 1981 and continuously since (s.40(6)). The cap is built from two pieces: the gain worked out as if the property had been sold on December 31, 1981 at its fair market value, plus the gain worked out from January 1, 1982 to the actual sale (using that 1981 value as the starting cost and without the extra “one” year), less any amount by which the 1981 value is higher than the actual sale price. In practice that means the couple’s pre-1982 years can be sheltered on both properties, and the decision that carries the money is which property takes the post-1981 years.

Situation 3: some years were not designated, and a T664 was filed in 1994

This is where cottages and once-rented homes usually land. When a property is not designated for some years, the formula from Situation 1 leaves a taxable slice. A hypothetical to show the shape only: a home owned for 30 tax years after its acquisition date and designated for 24 of them gets an exempt share of (1 + 24) / 30, so 5/30 of the gain is taxable, before any adjustment for a 1994 election. (These figures are invented for illustration, not drawn from any real sale.)

The adjustment matters if you or your spouse filed Form T664 (or T664 (Seniors)), the CRA’s “Election to Report a Capital Gain on Property Owned at the End of February 22, 1994”. Under s.110.6(19), the election treated the property as sold at the end of February 22, 1994 for the amount designated in the election, and reacquired immediately afterward. Two consequences follow when you sell today:

If the property was your principal residence for 1994, or you are designating it for any year, the gain is first worked out from the original cost, ignoring the election, and then reduced by an amount that reflects the gain the election already reported (s.40(2)(b), element D). The CRA has you calculate that reduction on T2091(IND)-WS, the Principal Residence Worksheet, alongside T2091(IND). The reduction applies whichever spouse filed the election.

If the property was not your principal residence for 1994 and you are not designating it for any year, the CRA guide says the gain is calculated the regular way, and your cost base is usually the amount you designated on the T664.

Situation 4: the home is sold by an estate

When an owner dies, the Act treats each capital property as sold immediately before death at its fair market value (s.70(5)(a)). That deemed sale is where the principal residence rules, including the pre-1982 designations and any 1994 election, actually do their work: on the deceased’s final return. According to the CRA guide, the legal representative (the executor or administrator) designates the property using Form T1255, the version of the designation form for a deceased individual.

Whoever acquires the home because of the death, typically the estate, takes it at a cost equal to that same fair market value (s.70(5)(b)). So when the estate later sells, its own gain or loss is measured only from the date of death. A trust’s ability to designate a principal residence is governed by its own, separate set of conditions in the Act, so the post-death period is a question for the estate’s accountant.

One exception: if the home passes to a surviving spouse (or a qualifying spouse trust) under s.70(6), there is no deemed sale at market value. Instead, for the principal residence calculation, the spouse is treated as having owned the home for the whole period the deceased did, and the deceased’s eligible years carry over (s.40(4)). The old rules then come into play only when the surviving spouse eventually sells.

Before you list: what to confirm for your situation

Bring these answers to your accountant before the sale closes, not after the tax slip arrives.