- Selling your principal residence must be reported on your T1 return for the year of sale, even if the whole gain is exempt.
- A home qualifies for a year only if you designate it and you, a spouse or partner, or a child lived in it at some point that year.
- A home held for less than 365 consecutive days is generally treated as business income, with limited exceptions.
- Forgetting the designation can lead to a late-designation penalty of up to $8,000.
Most Ontario homeowners expect that selling the family home is tax-free. Often it is, but the exemption is not automatic in the way many people assume. The CRA expects you to report the sale and make a designation, and some sales do not qualify at all.
This article explains in plain language how the principal residence exemption works, what to report, and the situations where the rules change, such as a quick resale, a home turned into a rental, or a home with a home office. Your facts matter, so a lawyer or accountant can confirm how this applies to you.
What counts as a principal residence
A home can be your principal residence for a given year if you, alone or jointly with someone else, designate it, and you, a current or former spouse or common-law partner, or a child lived in it at some point that year. Eligible housing includes a house, cottage, condominium, apartment, duplex apartment, trailer, mobile home or houseboat.
Land that goes with the home is usually limited to half a hectare, which is 1.24 acres. More land may qualify if it is needed to use and enjoy the home, for example where the municipal minimum lot size is larger.
For 1982 and later years, a family can designate only one home as its principal residence per year. If you sell one home and buy another in the same year, the 'plus 1' rule may allow you to designate the sold home for that year too. If you own a cottage as well as a house, this one-per-year limit is why the choice of designation matters.
What you must report, even if the gain is exempt
Starting with the 2016 tax year, the sale of a principal residence must be reported on your T1 return for the year of sale, on Schedule 3 (Capital Gains), even if the whole gain is exempt. The basic information is the date you acquired the property, the proceeds of disposition and a description of the property.
For sales in 2017 and later, Form T2091(IND) must also be completed. Only page 1 is needed if the property was your principal residence for all the years you owned it, or all but one year.
If you forget the designation, you should ask the CRA to amend that year's return. The CRA may accept a late designation, but the penalty is the lesser of $8,000 or $100 for each complete month from the original due date to the date of your request. Accepting a late designation is discretionary, so it is far better to file correctly the first time.
When the exemption may not apply
The exemption does not cover every sale. The table below sets out the main situations people run into.
| Situation | General treatment |
|---|---|
| Owned for less than 365 consecutive days | Generally treated as business income, not a capital gain |
| Home becomes a rental (change in use) | Generally treated as a sale at fair market value followed by immediate reacquisition |
| Part of the home used to earn income | Proceeds and cost are split between the personal and income-producing parts |
| Selling at a loss | Losses on a principal residence are not deductible because it is personal-use property |
The 365-day rule has exceptions for listed life events: death, relationship breakdown with at least 90 days' separation, threat to personal safety, serious illness, an eligible relocation 40 km or more closer to work or school, involuntary job termination, insolvency, and destruction or expropriation. If you are selling quickly after buying, ask a professional whether one of these fits your situation.
Renting out your old home before selling
Moving out and renting the home is a change in use, which is generally treated as a sale at fair market value followed by immediate reacquisition. A subsection 45(2) election lets you avoid that deemed sale and keep designating the property for up to four years while you are not living in it, as long as no other property is designated and you remain a Canadian resident. The election is made by attaching a signed letter.
If you use part of your home to earn income, such as a rented basement, you split proceeds and cost by square metres or rooms. How much of the gain is taxable then depends on your numbers, which is where an accountant is especially useful.
What to do next
- Find your purchase date, closing statement and the sale price, since the date acquired and proceeds must be reported.
- List every year you owned the home and note which years it was your family's principal residence.
- Check whether you owned another home or cottage that you might also want to designate for the same years.
- Note any period when the home was rented or partly used for income.
- Check how long you owned the home if it was under a year, and whether a life event applies.
- Ask your accountant to complete Schedule 3 and Form T2091(IND) with your tax return for the year of sale.
- Ask your lawyer to send you the final statement of adjustments after closing so your figures match.
If the numbers are large or the facts are mixed, speak with a lawyer or accountant before you list the property, not after closing.
Frequently asked questions
Do I report the sale if I pay no tax?
Yes. The sale of a principal residence must be reported on Schedule 3 of your T1 return for the year of sale, even if the whole gain is exempt. For sales in 2017 and later, Form T2091(IND) is also required.
What if I forgot to designate my home?
You should ask the CRA to amend that year's return. The CRA may accept a late designation, but the penalty is the lesser of $8,000 or $100 for each complete month from the original due date to the date of your request.
Can I claim a loss if I sell my home for less than I paid?
Generally no. Losses on a principal residence are not deductible because it is personal-use property.
Can my spouse and I each designate a different home?
For 1982 and later years, a family can designate only one home as its principal residence per year. How this works for a particular couple depends on the facts, so confirm with an accountant.
Sources
- CRA – Reporting the sale of your principal residence — canada.ca
- CRA – Principal residence — canada.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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