- A home qualifies for a year only if it is a housing unit you own, you or certain family members lived in it that year, and you designate it.
- For 1982 and later years, a family can designate only one home per year, which matters if you own a house and a cottage.
- Even a fully exempt sale must be reported on Schedule 3 with Form T2091(IND).
Selling the home you live in is often the biggest financial event in a person's life. In Canada, the principal residence exemption can make some or all of the gain tax-free, but only if the property qualifies and you report it properly.
This article explains what counts as a principal residence, how the exemption is reported, and what happens when the home was not your principal residence every year you owned it. If you have a cottage, a rental unit or time outside Canada, details matter, so confirm them with an accountant or lawyer.
What counts as a principal residence
A property qualifies 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.
The home can be a house, cottage, condominium, apartment, trailer, mobile home or houseboat. The land that counts is usually limited to half a hectare (1.24 acres), and more can count only if you show it is needed to use and enjoy the home.
A seasonal cottage can qualify, because a home can still be ordinarily inhabited if you live in it for only a short time in the year. However, if the main reason for owning a unit is to earn income, it is generally not treated as ordinarily inhabited when you live in it only briefly.
One home per family each year
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, since you choose which one to designate for each year.
- Exceptions to the one-home limit exist for older years: under the pre-1982 rules, a family could designate more than one home per year, and common-law partners could designate different homes for the years 1982 to 1992.
- A spouse or common-law partner is not part of your family unit if, throughout the year, they lived apart from you and were separated under a judicial separation or a written separation agreement.
Reporting the sale and the exemption
When you sell your principal residence, you must report the sale and the designation on Schedule 3 (Capital Gains or Losses) and complete Form T2091(IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust). If the property was solely your principal residence for every year you owned it, you usually pay no tax on the gain.
If you are the executor of a deceased person, you use Form T1255 instead, and a personal trust that claims the exemption files Form T1079.
If you forget to designate, the CRA will accept a late designation in certain circumstances, but a penalty may apply. How a penalty would apply to your situation, and whether it could be reduced or waived, depends on the facts, so it is worth confirming with an accountant or lawyer.
When only part of the gain is exempt
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; in the CRA's example, $50,000 × (8 ÷ 10) is $40,000 exempt. The extra year is the "plus 1" rule, which lets you treat both the home you sold and the one you bought as eligible in the year you change homes, provided you were resident in Canada in the year you bought the new one.
| Situation | How it affects the exemption |
|---|---|
| Years not resident in Canada | Do not count as designated years, but still count as years owned |
| Part of the home rented out | Split price and cost base on a reasonable basis, such as square metres or rooms; only the gain on the income part is reported on line 13800 of Schedule 3 |
| Small, ancillary rental use | The CRA generally keeps full treatment if there is no structural change and no CCA is claimed |
| Moving out and renting the home | Treated as a sale and repurchase at fair market value, unless an election applies |
| Owned under 365 consecutive days | Under the flipping rule, profit is business income and the exemption is not available, unless the sale is due to a listed life event (such as death, serious illness, involuntary job loss or a threat to personal safety) or to a marriage or common-law breakdown after at least 90 days living separate and apart |
If you turn your home into a rental, you can elect not to be treated as having changed its use, and you can then designate it for up to four years, but you cannot claim CCA while the election applies. The election is made with a signed letter attached to your return for the year of the change. Employer relocations and rentals converted back to your home have their own conditions, so get advice before relying on them.
What to do next
- List every year you owned the home and whether you lived there.
- Note any year the home was rented, or any year you were outside Canada.
- If you own a second property, decide which year each one is designated.
- Collect the purchase price, closing costs and records of selling costs.
- Ask an accountant or lawyer how to complete Form T2091(IND) if anything is unusual.
If you have already sold and did not report, speak with an accountant or lawyer soon about a late designation.
Frequently asked questions
Do I pay tax when I sell my home in Ontario?
If the property was solely your principal residence for every year you owned it, you usually pay no tax on the gain. You still report the sale on Schedule 3 and complete Form T2091(IND).
Can I claim both my house and my cottage?
Generally not for the same year. For 1982 and later years, a family can designate only one home as its principal residence per year. There are exceptions: a spouse or common-law partner who lived apart from you all year under a judicial separation or written separation agreement is not part of your family unit, and common-law partners could designate different homes for 1982 to 1992. A seasonal cottage can qualify as a home.
What if I forgot to designate my home?
The CRA will accept a late designation in certain circumstances, but a penalty may apply. Whether a penalty applies to you, and how much, depends on your situation, so it is worth confirming with an accountant or lawyer.
What if I rented out the home for a while?
It depends on how. If you rented part of it, you split the price and cost base and report only the gain on the income part. If you moved out and rented all of it, you are generally treated as having sold it unless an election applies.
Sources
- CRA – Principal residence — canada.ca
- CRA Income Tax Folio S1-F3-C2, Principal Residence (¶2.13) — canada.ca
- CRA – Residential Property Flipping Rule — canada.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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