Principal residence exemption in Canada, step by step

This guide is general information, not tax or financial advice. Check with the CRA, Revenu Québec or a professional for your own situation.

When you sell your home in Canada, the gain is usually tax-free. That is the principal residence exemption, and it is one of the most valuable tax rules most families will ever use. But it isn't automatic. You have to report the sale, and if your family owns more than one property, rents part of it or changed how it was used, the details matter.

What counts as a principal residence

A principal residence can be a house, a cottage, a condo, an apartment, a mobile home or even a houseboat. According to the CRA, a property qualifies for a year when all of these are true:

You own it, alone or jointly with someone else.
You, your current or former spouse or common-law partner, or one of your children lived in it at some time during the year.
You designate it as your principal residence for that year.

The land under and around the home generally counts too, up to half a hectare. More land is included only if you can show it was needed to use and enjoy the home.

One property per family unit per year

Since 1982, a family can designate only one property as its principal residence for each year. For this rule, your family unit is you, your spouse or common-law partner (unless you were living apart under a legal or written separation agreement) and your children under 18 who are not married or in a common-law relationship.

So a couple who owns a house in town and a cottage can't shelter both for the same years. When one of them is sold, they choose which years to put on it, and those years can't be used again for the other one.

The formula and the "plus one" rule

The exempt part of the gain is:

Gain × (1 + number of years designated) ÷ number of years you owned it

The extra 1 exists because people often own two homes in the same year when they move. It lets you treat both as your principal residence in the year you sell one and buy the other, even though only one can be designated.

Example. You bought a condo in 2015 and lived there until you sold it in June 2022. In May 2022 you bought a house. You owned the condo in 8 tax years (2015 to 2022). If you designate the condo for 2015 to 2021 (7 years), the exempt part is (1 + 7) ÷ 8 = 100%. The whole gain is tax-free, and 2022 stays free to designate on the house.

Partial designation

You don't have to designate every year you owned a property. Sometimes it pays to split the years between two properties, so each one gets the years where it gained the most per year.

Example. Your cottage shows a $200,000 gain after 10 years of ownership. If you designate it for 4 years, the exempt part is (1 + 4) ÷ 10 = 50%, so $100,000 is exempt and the other $100,000 is a taxable capital gain. Those 4 years can no longer be designated on your house when you sell it later.

Reporting the sale (since 2016)

Since the 2016 tax year, you must report the sale of your principal residence on your return, even when the whole gain is exempt. The CRA allows the exemption only if the sale and the designation are reported.

Report the sale on Schedule 3, Capital Gains (or Losses): the year you bought the property, the proceeds of the sale and a description of the property.
Fill in Form T2091(IND), Designation of a Property as a Principal Residence by an Individual. If the home was your principal residence for every year you owned it, or for all years but one, page 1 is enough. Otherwise, fill in the whole form to work out the taxable part.
In Québec, also fill in form TP-274, Designation of Property as a Principal Residence, and check box 109 in Part A of Schedule G, then send both with your Québec return.

If you forgot to report it, ask the CRA to amend your return for the year of the sale. The CRA can accept a late designation, but a penalty may apply: the lesser of $8,000 or $100 for each full month late. Revenu Québec's penalty for not sending form TP-274 is $100 a month, up to $5,000.

Rentals and changes in use

Every time you change the use of a property, for example by turning your home into a rental or moving into a rental you owned, the tax rules treat it as if you had sold it at its fair market value and bought it back right away.

Home to rental. You can elect under subsection 45(2) of the Income Tax Act to cancel that deemed sale. The property can then stay your principal residence for up to four years while it is rented, as long as you stay a Canadian resident, designate no other property for those years and claim no capital cost allowance (CCA) on it.
Rental to home. A 45(3) election can let up to four years before the move-in count as principal residence years, on similar conditions.
Renting part of your home. Renting a room or having a home office usually does not change the use of the property if the rental is secondary to living there, you make no structural change and you claim no CCA on that part. Converting part of the house into a separate unit, or claiming CCA, can mean that part is treated as sold.
Selling quickly. A home owned for less than 365 consecutive days is caught by the flipping rule: the gain is treated as business income, not a capital gain, so the exemption doesn't apply. There are exceptions for certain life events, such as a death in the family, a separation, a serious illness, losing your job or moving at least 40 km closer to a new job or school.

Keep records year by year

The sale may be decades away, and you'll need proof of what happened in each year. Keep:

The purchase deed, the price and the closing costs.
Receipts for capital improvements (a new roof, an addition), which raise your cost and lower the gain.
Which property each member of the family lived in, year by year.
The dates when any part was rented, the rents, and the CCA claimed each year.
Any 45(2) or 45(3) election you filed, and a valuation at each change in use.

How Indivia helps

The Cost base and gain tab of a property shows its adjusted cost base (the price, the closing costs and the capital improvements) and estimates the capital gain if you sold today, the taxable part and your share. Under Principal residence, pick the years the property was your principal residence. The exempt part follows the (1 + years designated) ÷ years owned formula, and if the same year is also designated on another of your properties, the tab warns you that only one property per family can be the principal residence in a year.

When you sell, the Sale wizard records the price, the selling costs and the mortgage paid out, and the tab becomes Sale and gain, with the exemption and the years designated. The Net worth page's estimated tax on your gains leaves out principal residence years. Each property also has a Documents tab for the deed and receipts. These are estimates, not tax advice.

The cost base, capital gain and principal residence years are part of the Free plan. Recording the CCA claimed each year, for a home you rent out in whole or in part, is part of the Real-Estate Investor plan.

Sources

In Indivia’s help

Indivia keeps the numbers these guides talk about, for every property, account and person in your household.

Try Indivia free