Home and Cottage in Ontario: Which One Gets the Principal Residence Exemption?

Many Ontario families own a home in the city and a cottage. When one of them is sold, a practical question follows: which property gets the principal residence exemption, and what happens to the gain on the other one?

The answer depends on how many years each property was designated, who counts as part of your family unit, and how the cottage was used. This article explains the general rules in plain language so you know what to ask your lawyer or accountant.

The one-home-per-family rule

A property counts as your principal residence for a year only if it meets all of the following conditions: it is a housing unit (or a leasehold interest in one), you own it alone or jointly, you or certain family members lived in it at some time during the year, and you designate it as your principal residence. A house, cottage, condominium, apartment, trailer, mobile home or houseboat can all qualify.

For 1982 and later years, a family can designate only one home as its principal residence for each year. This is the key limit when a family owns both a city home and a cottage.

There are exceptions to who is counted in the family and when the limit applies:

• Under the pre-1982 rules, a family could designate more than one home per year.
• Common-law partners could designate different homes from 1982 to 1992.
• A spouse or common-law partner is not part of your family unit for this limit if, throughout the year, they lived apart from you and were separated under a judicial separation or a written separation agreement.

Can a seasonal cottage count?

Yes, it can. A home can still be ordinarily inhabited if you live in it for only a short time in the year, so a seasonal cottage can qualify.

The exception is a property whose main reason for ownership is to earn income. In that case, it is generally not treated as ordinarily inhabited when the owner lives in it for only a short time in the year. If you rent your cottage out for much of the year, how it is used matters, so get advice before assuming it qualifies.

Land is also limited. The land that can count as part of a principal residence is usually limited to half a hectare (1.24 acres), and more land can count only if you show it is needed to use and enjoy the home. Many cottage lots are larger than that, so the part of the lot beyond the limit may not be sheltered.

How the exemption is calculated

If the property was solely your principal residence for every year you owned it, you usually pay no tax on the gain because of the principal residence exemption.

If it was not your principal residence for every year you owned it, only part of the gain is exempt. The exempt part is the gain × (designated years + 1) ÷ years owned. The CRA's example is $50,000 × (8 ÷ 10) = $40,000 exempt.

The extra year in the formula reflects the "plus 1" rule. It lets you treat both the home you sold and the home you bought as eligible for the exemption in the year you change homes, as long as you are resident in Canada during the year you buy the new principal residence.

Because only one home can be designated for each year, a family with a home and a cottage often has to decide which property to designate for which years. That choice affects how much of each gain is exempt, so it is worth working through before you sell either property.

Reporting the sale and the risk of a late designation

When you sell your principal residence, you must report the sale and the designation on Schedule 3 (Capital Gains or Losses). You also complete Form T2091(IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust). An executor or other legal representative of a deceased person uses Form T1255 instead.

A capital gain is the proceeds of disposition minus the property's adjusted cost base and any outlays and expenses of selling it. The capital gains inclusion rate for 2025 is 50%, so half of a capital gain is taxable. Check the current year's CRA guide for the rate that applies to your sale.

If the designation is missed, the CRA will accept a late designation in certain circumstances, but a penalty may apply. Whether a penalty applies to you, and how much it would be, depends on your situation, so it is worth confirming with a lawyer before you file late.

What to do next

• List each property you own and the years you owned it.
• Note who in your family unit owned or lived in each property, and whether any spouse was separated under a judicial separation or written separation agreement.
• Record how the cottage was used each year, including any rental.
• Check the size of each lot against the half-hectare limit.
• Gather purchase and sale documents and the costs of selling.
• Ask a lawyer or accountant which years to designate for each property before you file.

Frequently asked questions