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How to report partial use, inherited property, and complete the required forms

Understand how to handle complex principal residence cases involving mixed use, inherited homes, and how to complete Form T2091 and Schedule 3 accurately

While the principal residence exemption (PRE) is often associated with a simple home sale, more nuanced situations require careful handling. Whether part of your home was rented, inherited from a relative, or held during a time when another property was designated, it’s critical to report correctly and maintain compliance with CRA expectations.

This guide explains how to apply the exemption in partial-use and inherited scenarios, and how to complete Form T2091 and Schedule 3 accurately.

Partial Use of a Principal Residence

If you used part of your home for business, rental, or short-term accommodation, the full exemption might not apply. CRA looks closely at whether the use was incidental or whether a change in use occurred that affects tax treatment.

There are two outcomes depending on how the space was used:

1. Incidental Rental or Business Use

In cases where the home was mostly used as a residence and only a small portion was rented or used for business (without claiming depreciation or creating a separate dwelling), the entire gain may still qualify for the full exemption.

  • No physical division of the property

  • Minimal or occasional income use

  • No capital cost allowance (CCA) claimed

2. Declared Change in Use

If you converted part or all of your home to rental or business use—particularly if you claimed CCA—you are considered to have made a change in use, which triggers a deemed disposition and limits the PRE to personal-use years only.

Tip: If you only rented part of your home for short periods (e.g. on Airbnb) and didn’t make structural changes or claim CCA, you may still qualify for the full PRE. Keeping clear records and not claiming depreciation can help preserve the exemption.

Inherited Property and the PRE

You cannot claim the principal residence exemption for someone else’s period of ownership. However, if you inherit a property and begin using it as your residence, you may be able to claim the exemption from the time you started living there.

  • You must ordinarily inhabit the property after inheriting it

  • You can designate it as your principal residence for those specific years

  • The deceased’s use of the property has no bearing on your exemption claim

The estate of the deceased may also apply the PRE to shelter capital gains up to the date of death. You should verify this with the executor or through a review of the deceased’s final return.

Comparing Exemption Treatment in Special Situations

Situation Exemption Eligibility Key Notes
Entire home used as a residence Full exemption available Must be designated and inhabited by owner or family member
Partial incidental rental use Full exemption likely No structural division or CCA claimed
Part of home converted to rental use Partial exemption Gain must be prorated based on years and portion used
Inherited property, used as home Partial or full exemption (your use) Only years you lived in the home count; must report on sale
Multiple properties owned One property per year Choose the property with the highest gain per year

Completing Schedule 3 and Form T2091

You must report the sale of your principal residence—even if the full gain is exempt. The CRA requires this for all property sales after 2016.

Schedule 3

  • Complete the “Real Estate, Depreciable Property, and Other Properties” section

  • Provide details such as the year of acquisition, year of sale, and proceeds

  • Indicate that the principal residence exemption is being claimed

Form T2091 (IND)

This form calculates the portion of the gain that is exempt:

  • Use the principal residence formula to prorate the exemption if needed

  • Fill in the number of years the property was designated (plus one bonus year)

  • Attach the form to your tax return when you claim the exemption

Important: Failing to report the sale can result in penalties—even if no tax is owed. You must file Schedule 3 and Form T2091 to claim the exemption. If you miss this step, CRA may deny the exemption, leaving the full capital gain taxable unless you request an amendment and pay penalties.