The principal residence exemption (PRE) is perhaps the most significant tax break for Canadians The PRE allows individuals to exclude all or part of the gain from their principal residences in the year of sale. To claim the PRE, taxpayers must file a prescribed form designating the property as their principal residence and specifying the relevant years of designation. For individuals, the prescribed forms are T2091(IND), or T1255 where the designation is made by a legal representative of a deceased taxpayer. Certain trusts may also make a PRE designation.
A designation may be missed due to oversight or because the taxpayer is unaware that a "deemed" disposition has occurred (e.g., changes in use). A PRE designation may be late filed but individuals could be assessed a penalty of $100 per complete month that it is late (up to $8,000).
We reached out to the CRA to clarify whether these penalties are applied automatically or at the CRA's discretion. The CRA appears to be exercising discretion before applying this penalty.
"Since January 1, 2016, individuals must report the sale of a principal residence on their tax return and file Form T2091 (IND) to designate the property as their principal residence in order to claim the exemption.
The Canada Revenue Agency (CRA) has the authority under ss. 220(3.2), 220(3.21) and 220(3.5) to assess the penalty when the property is "late designated" as principal residence. The CRA may impose a penalty of up to $8,000. The CRA has discretion to accept late-filed designations without penalties under the taxpayer relief provisions if there are valid reasons. This means that while penalties can be assessed, the CRA may waive them if the taxpayer provides a reasonable explanation and applies for relief.
There was indeed a period of leniency when the reporting requirement was first introduced in 2016. When the CRA implemented the reporting requirement for principal residence disposition, it administratively chose not to assess the ss. 220(3.5) penalty for late-filed designations in the early years (2016, 2017), particularly when there was no evidence of tax evading. This leniency (referred to as amnesty period) has no statutory basis.
Currently, the compliance program applies the penalty on a case-by-case basis in specific contexts, typically through audits or targeted reviews."
Originally posted to LinkedIn on July 30, 2025
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Ryan Minor
Chartered Professional Accountants of Canada
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