Principal Residence Exemption in Ontario: Rules and Reporting a Sale

Selling the home you live in is often the biggest financial event in a person's life, and many sellers hope the profit will be tax-free. In most ordinary cases it is, but only if the property qualifies and you report the sale correctly.

This article explains what counts as a principal residence, how the exemption works when it covers only some years, and how the sale is reported to the Canada Revenue Agency (CRA). Your own facts can change the result, so treat this as general information.

What counts as a principal residence

A property qualifies as your principal residence for a year only if it meets all of these 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 principal residence can be a house, cottage, condominium, apartment, trailer, mobile home or houseboat. The land that can count is usually limited to half a hectare (1.24 acres). More land can count only if you show it is needed to use and enjoy the home.

Is the gain tax-free?

A capital gain is the proceeds of disposition minus the property's adjusted cost base and any outlays and expenses of selling it. 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 the home 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 that formula is the "plus 1" rule. It lets you treat both the home you sold and the home you bought as eligible in the year you change homes, provided you are resident in Canada during the year you buy the new principal residence.

Situations that change the result

• Non-residents: years you were not resident in Canada do not count as designated years, but they still count as years owned.
• Partly rented homes: if you used part of the home to earn income, you split the selling price and adjusted cost base between the two uses on a reasonable basis, such as square metres or number of rooms. Only the gain on the income-producing part is reported, on line 13800 of Schedule 3.
• Small rental use: the CRA generally keeps full treatment where the income-producing use is ancillary to the home's main use as a residence, there is no structural change, and no CCA is claimed.
• Moving out and renting: every change in use is treated as a sale at fair market value and a purchase back at the same amount, though an election can avoid that.
• Flipping: if a housing unit in Canada was owned for less than 365 consecutive days before sale, the profit is deemed business income and the exemption is not available. Exceptions exist for certain life events.

Reporting the sale

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).

If the sale is for a deceased person, the executor or other legal representative uses Form T1255 instead of T2091(IND). A personal trust that claims the exemption files Form T1079.

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

What to do next

• List every year you owned the home and note any year it was rented, empty or lived in by someone else.
• Find your purchase documents and selling costs to work out the adjusted cost base.
• Check whether you owned another home, such as a cottage, in the same years.
• Complete Schedule 3 and Form T2091(IND) with your return for the year of sale.
• Ask an accountant or lawyer if the home was rented, you were a non-resident for any period, or the sale happened within a year of purchase.

Frequently asked questions