How is the principal residence exemption calculated in Canada, and what is the plus one rule?
This answer covers Canadian federal tax law, which applies in every province.
The exempt part of your gain is worked out under a formula in paragraph 40(2)(b) of the Income Tax Act, which starts from the gain (A) and uses a fraction of B over C. The gain (A) is proceeds minus adjusted cost base and selling costs. B is one plus your designated years; C is the years you owned the home.
That extra year makes the whole gain exempt when the home was your principal residence for all years owned except one. It also lets you designate the sold home for the year of sale when you bought another home that year. It is not available if you were not a Canadian resident in the year you bought the new property. Vacant land years count in C but not B, and a cap under s. 40(6) can limit the gain on a home owned since before 1982.
Half of any remaining gain is taxable and goes on line 12700. A loss on your home cannot be claimed. Page 1 of Form T2091(IND) is enough if the home qualified for all years or all but one. Your facts can change the result, so confirm with a lawyer or accountant.
Key takeaways
- The exempt part of your gain is worked out under paragraph 40(2)(b) of the Income Tax Act, using the gain (A), a fraction of B over C, where B is one plus your designated years and C is the years you owned the home.
- If the home was your principal residence for all years owned except one, the extra year in B makes the whole gain exempt.
- The extra year is not available if you were not a Canadian resident in the year you bought the new property, and vacant land years count in C but not in B.
- Half of any remaining gain is taxable and goes on line 12700, and a loss on your home cannot be claimed.