Does the principal residence exemption apply when someone dies?

Yes. The principal residence exemption (PRE) can shield the family home from capital gains tax on the deemed disposition that occurs at death. If the deceased designated the property as their principal residence for each year they owned it, the full capital gain may be exempt.

The exemption is claimed on the terminal return (Schedule 3 and the principal residence designation form). The executor should ensure the designation is made properly, as failing to designate can result in losing the exemption.

There are nuances to be aware of. Only one property per family unit can be designated as a principal residence per year. If a couple owns a cottage and a home, only one can be the principal residence for any given year — choosing which property to shelter from tax (if both have gains) is a planning decision. If the property passes to a surviving spouse, the gain can be deferred under the spousal rollover, and the exemption claimed later on the survivor's death.

The PRE does not apply to rental properties, investment properties, or properties that were never used as an actual residence. An accountant should confirm how to claim the exemption correctly on the terminal return.