Does the CRA Audit the Sale of a Principal Residence in Canada?

You sold your home and reported the gain as exempt under the principal residence exemption. Months later you wonder whether the CRA will ever ask you to prove it.

The CRA does review real estate sales, but not every sale is audited. This article explains what you must report, what draws attention, and the proof worth keeping.

This article covers Canadian federal tax law, which applies in every province.

You must report the sale even when it is exempt

Principal residence sales must be reported on the return for 2016 and later years, even if there is no gain or the whole gain is exempt. The CRA allows the exemption only if the disposition and designation are reported, using Form T2091(IND) from 2017.

If the designation was missed, the Minister may accept a late designation under s. 220(3.2). A lawyer or accountant can tell you whether that route makes sense for your situation.

Does the CRA actually audit these sales?

The CRA audits files it identifies as high risk using risk-assessment tools, analytics, leads and third-party data. For April 2024 to March 2025 it completed 14,854 real estate audit files, with total audit assessments of $849.0 million. Those figures cover one period only and are not a prediction of your own risk.

Property flips are generally fully taxable as business income. Whether your own sale could be looked at more closely depends on the facts, so it is worth confirming with a lawyer or accountant. The Minister is also not bound by a return or information you supplied, and may assess tax payable even if the information was inaccurate.

If you are audited, the auditor contacts you by mail or phone and examines your records on site or at a CRA office. The outcome is no change, a reassessment owing more tax, or a refund. How long it takes depends on the condition of your records, the scope of the audit and any delays from missing records, and good records and co-operation reduce the time.

What the exemption requires

• The exempt portion uses 1 plus the number of years the property was designated, divided by years owned, often called the one-plus rule.
• The housing unit must be ordinarily inhabited in the year by the owner or a family member.
• Only one property per family unit can be designated for a year after 1981.

There are exceptions. A spouse is not counted in the family unit for designation purposes if they lived apart throughout the year under a judicial separation or written separation agreement. A change-of-use election under s. 45(2) or (3) can keep a property qualifying for up to four years without occupancy.

Mixed use and rental portions

If part of the home was rented, keep detailed records of rental income and expenses with invoices, receipts and contracts. They are not filed with the return but must be kept in case the CRA asks, and unsupported expenses may be disallowed. Rental income and expenses are reported on Form T776.

Where a rental property is also used personally, the personal portion of each expense is not deductible. Whether any part of the gain on a partly rented home remains exempt depends on the facts, so confirm it with a lawyer or accountant.

What proof to keep and what to do next

Books and records must generally be kept for a minimum of six years. For a home sale, consider keeping them for at least that long after you file.

• The purchase and sale documents, including closing statements.
• Proof that you or a family member lived in the home, such as utility bills, a driver's licence and address records.
• A copy of Form T2091(IND) and the return on which you reported the sale.
• Receipts for improvements, to support the cost of the property.
• Rental records and Form T776 if part of the home was rented.
• Separation agreement or change-of-use election documents, if they apply.

If the CRA sends a letter about your sale, respond by the deadline it sets and consider getting advice before you reply.

If you disagree with an assessment, an individual must generally serve a notice of objection by the later of one year after the filing-due date and 90 days after the notice of assessment was sent. Interest on unpaid tax runs at the prescribed rate for as long as the amount is outstanding, and that rate is set quarterly.

Frequently asked questions