How does the principal residence exemption work in Ontario?

The principal residence exemption (PRE) allows Canadians to shelter all or part of the capital gain on the sale of their home from income tax. If the home was your family's principal residence for every year you owned it, the entire gain is exempt — you pay no capital gains tax on the sale. This is one of the most valuable tax shelters available to individual taxpayers in Canada, and it applies equally to Ontario residents.

A principal residence can be a house, condo, cottage, or even a mobile home, as long as you or your immediate family ordinarily inhabited it at some point during each year being designated. Each family unit (you plus your spouse and minor children) can only designate one property as their principal residence per year, so owning a cottage and a home simultaneously means you must allocate the designation years strategically to maximize the exemption across both properties.

Since 2016, you must report the disposition of a principal residence on Schedule 3 of your T1 return and designate it in form T2091. Failing to report a sale is no longer acceptable even if the gain is fully exempt — the CRA requires disclosure. If you have used the property partly for rental purposes or a home office, the exemption may be partially limited.