How Much Land Around Your House Does the Exemption Cover in Canada?

If you own a large lot, a rural property or acreage, selling it raises a common question: does the principal residence exemption cover all of the land, or only the part near the house? The answer is not automatic, and the excess can create a taxable gain.

This article explains the half-hectare guideline, the exceptions, and how the sale is reported. Every property is different, so use it as a starting point for a conversation with a lawyer or accountant.

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

The half-hectare guideline

One-half hectare or less, including the area under the housing unit, is usually accepted as contributing to residential use. That is the general comfort zone for a principal residence. Land above that amount is generally not part of the principal residence.

The house itself must also meet the basic definition: a housing unit that you own and that you or a qualifying family member ordinarily inhabited in the year.

When more land can still qualify

Excess land can be included if it was necessary for the use and enjoyment of the property as a residence, for example because municipal minimum-lot or severance rules require it. Whether that is true depends on the facts, such as the zoning and any rules that applied when the land was acquired or used.

Land used to earn income generally does not qualify. Farmland, a rented-out field or land used for a business are examples where the income use is a concern. Also, years in which the property was vacant land count in the number of years owned (C) but not in the designated-years count (B), so they reduce the exempt fraction.

Selling part of the lot

The whole property can be designated to shelter a partial disposition, for example a severed lot, with the non-qualifying portion taxed separately. Where only part of a property is the principal residence and the rest earned income, the selling price and adjusted cost base are split by square metres or number of rooms, if the split is reasonable.

Calculating and reporting the sale

The capital gain is the proceeds of disposition minus the adjusted cost base and the outlays and expenses of the sale; half of the capital gain is taxable. The adjusted cost base is generally the cost plus acquisition expenses such as commissions and legal fees, plus capital expenditures such as additions and improvements, but not current expenses like maintenance and repairs.

Since the 2016 tax year the sale must be reported on Schedule 3 even if the gain is fully exempt. If the property is 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). A home is personal-use property, so a loss on sale cannot be claimed.

Other rules that can affect a large-lot sale

Even when the land qualifies, the home still has to be designated for the right years. If a home is the principal residence for all years owned except one, the extra year in the exemption formula generally means the whole gain is exempt, because CRA explains it as letting you designate the sold home for the year of sale when you also bought another home that year. That extra year is not available if you were not a Canadian resident in the year you bought the new property. The points below can change the result, so check which ones fit your situation.

• Only one property per family unit can be designated 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.
• Co-owners each report their own share on their own return and designate the property separately. A co-owner who does not live in the home cannot designate it unless that co-owner, or their spouse, partner, former spouse or partner, or child, ordinarily inhabited it in the year.
• If part of the home is used for business and no capital cost allowance is claimed on it, the home can still be fully designated, but claiming that allowance on the business part can cost the exemption for that part.
• A gain on a housing unit in Canada owned less than 365 consecutive days before the sale is deemed business income, so the exemption does not apply, for dispositions after 2022. There are listed exceptions, such as death, serious illness or an eligible relocation.
• If you forget to designate in the year of sale, you can ask CRA to amend the return for that year. CRA may accept a late designation in certain circumstances, but a penalty may apply.

What to do next

• Get the lot size and a survey or plan showing the house footprint.
• Check zoning, minimum-lot and severance rules that applied to the property.
• List any part of the land used to earn income.
• Gather your purchase records, improvement receipts and sale costs.
• Confirm how the sale price will be split between land and building.
• Speak with a lawyer or accountant before listing, so the designation is reported correctly.

Frequently asked questions