The principal residence exemption

When you sell your home for more than it cost, the profit is a capital gain. If the home was your principal residence for every year you owned it, the principal residence exemption means you pay no tax on that gain. You still have to report the sale on your return, though, or you can lose the exemption.

What counts as a principal residence

A principal residence can be a house, cottage, condominium, apartment, trailer, mobile home or houseboat. It qualifies for a given year if:

• it’s a housing unit, a leasehold interest in one, or a share in a co-operative housing corporation bought to get the right to live in a unit
• you own it, alone or jointly with someone else
• you, your spouse or common-law partner (current or former), or any of your children lived in it at some time during the year
• you designate it as your principal residence

Living there for even a short time in the year can be enough, unless your main reason for owning the place is to earn income from it.

The land under and around the home can be included, usually up to a limited area. More land can qualify only if you can show you need it to use and enjoy the home.

One home per family each year

From 1982 on, a family can designate only one home as its principal residence for any year. For this rule (for 1993 and later years), your family is you, your spouse or common-law partner (unless you were separated all year under a court order or written agreement), and your children who were not yet 18 at the end of the year and had no spouse or partner during it.

So if your family owns a house and a cottage, only one can be sheltered for any given year. You make the designation when you sell (or are considered to have sold) a property, and you can choose not to designate a home for some years, leaving them for another property.

How much of the gain is exempt

If a home wasn’t your principal residence for every year you owned it, only part of the gain is exempt. The exempt share is the gain multiplied by:

(1 + the number of years you designate it as your principal residence while resident in Canada) ÷ the number of years you owned it

The extra year (the “plus one”) covers the year you sell one home and buy another: both can be fully sheltered even though you can designate only one for that year. If you weren’t resident in Canada at any time in the year you bought the home, you don’t get the extra year.

Any gain that isn’t exempt is a regular capital gain. For 2025, 50% of a capital gain is included in your income. See how capital gains are taxed. A home is personal-use property, so if you sell at a loss, you can’t claim the loss.

Report the sale, even if no tax is owed

If you sold a home that was your principal residence at any time, report the sale and the designation on Schedule 3, Capital Gains or Losses, and fill out Form T2091(IND). Since 2016, the CRA allows the exemption only if the sale and designation are reported on your return.

If you forgot, ask the CRA to change your return for the year of the sale. It can accept a late designation in certain circumstances, but a penalty may apply.

When the exemption doesn’t apply, or only partly

You owned it for less than a year. If you sell a home in Canada that you owned for less than 365 consecutive days, the profit is treated as business income rather than a capital gain, and the exemption isn’t available. A loss on such a sale is treated as nil. This flipping rule doesn’t apply if the sale happened because of, or in anticipation of, one of the life events the CRA lists, such as a death, a relationship breakdown, a serious illness or disability, an involuntary job loss, or an eligible move for work or full-time post-secondary studies.

You changed how you use it. If you turn your home into a rental or business property (or the other way around), you’re treated as having sold it at fair market value and bought it back. The gain for the years it was your principal residence is still exempt. If you move out and rent the whole home, you can elect (by a signed letter with your return for that year) to be treated as not having changed its use. You can then keep designating it as your principal residence for up to four years, or longer in some work-relocation cases, as long as you stay resident in Canada, don’t designate another home, and don’t claim capital cost allowance on it.

You use part of it to earn income. If you rent out a room or suite, or run a business from part of your home, part of the gain on a sale may be taxable. The whole property can keep its status as your principal residence if the income use is small compared with the home use, you make no structural changes for it, and you claim no capital cost allowance. See renting out part of your home.