Principal Residence Exemption When Selling a Home in Ontario

Selling a home in Ontario often produces a large gain, and many sellers hear that the profit is tax-free. That is often true, but only when certain conditions are met, and the exemption does not apply automatically.

This article explains how the principal residence exemption generally works, what you still have to report, and the situations where tax may apply. Your facts matter, so a lawyer or accountant can confirm how the rules fit your sale.

When the profit is tax-free

If your home was solely your principal residence for every year you owned it, no tax is payable on the gain when you sell. In plain terms, the profit is yours to keep.

The word "every" matters. If the home was not your principal residence for every year you owned it, how this applies depends on your situation, so it is worth confirming with an accountant or lawyer. A cottage or other property that was not designated as your principal residence is not exempt, and the gain must be reported as a capital gain.

You still have to report the sale

Tax-free does not mean unreported. You must report the sale and designate the home as your principal residence on Schedule 3 and Form T2091(IND). The CRA allows the exemption only if the designation is reported on your return.

Because the exemption depends on the designation being reported, build this step into your tax filing for the year of the sale.

Families can designate only one home a year

For 1982 and later years, a family unit can designate only one home as its principal residence for each year. A family unit is generally you, your spouse or common-law partner, and your minor children.

This matters if your family owns a house and a cottage. You cannot treat both as your principal residence for the same year, so a choice has to be made.

When tax may apply

For a flipped property, any loss is deemed nil. That means you cannot use the loss to offset other income.

Life events and flipped homes

The flipping rule does not apply if the sale results from certain life events. These include:

• the death of the taxpayer or a related person
• a related person joining the household
• marriage or common-law breakdown with at least 90 days of separation
• a threat to personal safety
• serious illness or disability
• involuntary job loss or an eligible relocation
• insolvency, or destruction or expropriation of the property

If you sold quickly for one of these reasons, keep records that show it.

What to do next

• List every year you owned the home and whether it was your principal residence.
• Check whether anyone in your family unit designated another property for the same years.
• Note any rental or business use of part of the home, and the size of the lot.
• Find your purchase and sale dates to see whether the 365-day rule could apply.
• Gather your closing documents and talk to an accountant before filing.
• If you are not a resident of Canada, ask about the notice you must give the CRA after the sale.

A non-resident who sells Ontario real estate must notify the CRA on Form T2062 within 10 days of the sale, and late notice carries a penalty. A buyer can be liable for the seller's tax without a certificate of compliance, which is why buyers may hold back part of the proceeds.

Frequently asked questions