Principal Residence Exemption

PRE

The rule that usually makes the gain on selling your own home tax-free, as long as you report the sale and designate the property.

The principal residence exemption can reduce or eliminate the capital gain when you sell your home. A property can qualify for a year if it was ordinarily inhabited that year. That can be by you, your spouse or common-law partner, a former spouse or partner, or your child. Even a short period of living there can meet the test.

For years after 1981, only one property per family unit can be designated for a given year. The exempt share follows a formula: one plus the number of years designated, divided by the number of years owned. The extra year helps when a family owns two homes in the same year, such as during a move.

The exemption is not automatic. Since the 2016 tax year, you must report the sale and designation on Schedule 3. For sales in 2017 and later, you also complete Form T2091(IND). The CRA allows the exemption only if you report the sale. A late designation may be accepted, with a penalty of $100 per complete month, up to $8,000.

Rental use can reduce the exemption. Turning your home into a rental is generally treated as a sale at fair market value on the date of the change. A subsection 45(2) election can defer that and let you keep designating the home for up to four years. You cannot claim capital cost allowance while it applies.

Renting part of your home can still leave the whole property sheltered under CRA practice. The rental use must be ancillary, with no structural changes and no capital cost allowance claimed. A home owned less than 365 days may be caught by the flipping rule instead. If your home has also been an investment, check CRA guidance or a tax professional before selling.

General information only, not legal, tax, or financial advice. Rules change and vary by province; confirm the current details with the relevant authority before you rely on them.