How Much Land Is Covered by the Principal Residence Exemption in Canada?

If your home sits on a large lot, a common worry is whether the whole property is tax-free when you sell. The answer depends on how much land there is and why you have it.

This article explains the usual half-hectare guideline, the exceptions for larger lots, and what to gather before you report the sale. Lot size questions are fact-heavy, so confirm your situation with a lawyer or accountant.

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

What counts as part of a principal residence

A principal residence is a housing unit you own, or a leasehold interest or co-op share giving the right to inhabit one, that you or certain family members ordinarily inhabit in the year. The land under and around the home is generally treated as part of the property, subject to limits.

Whether a unit is ordinarily inhabited is a question of fact. Even a short period of occupation in the year can be enough, but where the main reason for owning is to earn income a brief occupancy generally will not qualify.

Only one property per family unit can be designated as a principal residence for each year from 1982 onward. For 1993 and later years the family unit is you, your spouse or common-law partner and your unmarried children under 18. A spouse or common-law partner separated for the whole year under a court order or written separation agreement is not in the same family unit for that year.

The half-hectare guideline

Land of one-half hectare or less, including the area under the housing unit, is usually accepted as contributing to residential use. If your lot is at or under that size, the land is not usually the issue.

When extra land can still qualify

Land above one-half hectare is generally not part of the principal residence. The exception is where the extra land was necessary for the use and enjoyment of the property as a residence, for example because municipal minimum-lot or severance rules require it.

Land used to earn income generally does not qualify. If part of a home earned income, the selling price and adjusted cost base are split by square metres or number of rooms, if the split is reasonable.

Selling only part of the property

Sometimes you sell only a portion, such as a severed lot. The whole property can be designated to shelter that partial disposition, with the non-qualifying portion taxed separately.

Whether the excess land fits an exception is a question of fact, and municipal rules in your area may matter. A lawyer or accountant can review the details before you sell.

Reporting and next steps

The sale of a principal residence must be reported on Schedule 3 of the T1 return, even if the whole gain is exempt. If the property was sold as land and building, the selling price must be split between land and building on Schedule 3. Individuals designate the property and calculate any gain on Form T2091(IND).

The capital gain is proceeds of disposition minus the adjusted cost base and the outlays and expenses of the sale, and half of the capital gain is taxable. The adjusted cost base generally includes the cost plus acquisition expenses such as commissions and legal fees, plus capital expenditures such as additions and improvements, while current expenses such as maintenance and repairs cannot be added. A home is personal-use property, so a loss on the sale cannot be claimed.

• Get a survey or property description showing the size of your lot.
• Note any municipal minimum-lot or severance rules that apply to your property.
• Record any part of the land used to earn income.
• Keep purchase, improvement and sale documents together.
• Speak with a lawyer or accountant before you sell if your lot is large.

Frequently asked questions