When you sell your home in Canada, the capital gain is usually tax-free, but not always, and never without reporting it. Here is how the rules work, when you owe tax, and what you need to report.
The principal residence exemption (PRE)
The PRE is the rule that makes your home sale tax-free; the principal residence exemption guide covers the designation, the exemption formula and the special cases in full. It applies when:
| Condition | Requirement |
|---|---|
| You or your family ordinarily inhabited the property | Must have lived in it — not just owned it |
| You designate it as your principal residence | Must file the designation on your tax return |
| You owned the property as an individual | Trusts and corporations have different rules |
| Only one property per family unit per year | You and your spouse/common-law partner can only designate one property per year between you |
| Land up to one-half hectare | Land beyond one-half hectare is covered only if it’s needed to use and enjoy the home |
The PRE formula
If you lived in the home for the entire period of ownership, the full gain is exempt. If the property was your principal residence for only some years, the exempt portion is calculated as:
Exempt gain = Total gain × (1 + years designated) ÷ years owned
The “+1” in the formula provides a buffer year — useful when buying and selling properties in the same year.
Example: You owned a property for 10 years and designated it as your principal residence for 7 of those years.
| Total capital gain | $200,000 |
| Exempt portion | $200,000 × (1 + 7) ÷ 10 = $160,000 |
| Taxable gain | $40,000 |
| Tax owing (50% inclusion, 40% marginal rate) | $40,000 × 50% × 40% = $8,000 |
When you DO owe capital gains tax on your home
| Situation | Why You Owe Tax |
|---|---|
| You rented out the property (without 45(2) election) | Without the election, changing your home to a rental is treated as selling it at fair market value and buying it back, and any gain for years it wasn't your principal residence is taxable. |
| You own multiple properties | Can only designate one per year — the other may have a taxable gain |
| You flipped the property | A home owned less than 365 days is generally deemed business income under the flipping rule (fully taxable) |
| Property held in a corporation | PRE is not available to corporations |
| You are a non-resident | Different rules apply; the buyer withholds part of the price unless the CRA issues a clearance certificate (section 116) |
| Partial business use | If you used part of the home exclusively for business and claimed CCA, that portion is not exempt |
| Assignment sales (pre-construction) | Assigning a purchase contract before taking possession is generally taxed as business income |
Reporting requirements (even when tax-free)
Since 2016, you MUST report the sale on your tax return:
| Form | Purpose |
|---|---|
| Schedule 3 (Capital Gains) | Report the disposition |
| Form T2091 (Designation of a Property as a Principal Residence) | Designate the property and claim the exemption |
Late designation: the CRA can accept a late designation in some circumstances, with a penalty of $100 for each complete month late, up to $8,000, even if the gain is fully exempt.
Capital gains inclusion rate
| Gain Amount | Inclusion Rate | How It’s Taxed |
|---|---|---|
| All capital gains, any amount | 50% | Added to income at your marginal rate |
A 2024 federal budget proposal would have introduced a 66.67% rate for gains above $250,000 a year, but it was cancelled on March 21, 2025 and never took effect; the rate has stayed at 50%.
Example: $400,000 taxable capital gain (not covered by PRE):
- $400,000 × 50% = $200,000 included in income, taxed at your marginal rate
Renting out your home: the 45(2) election
Turning your home into a rental is a deemed sale at fair market value, but you can elect under subsection 45(2) of the Income Tax Act not to be treated as having changed its use: you then can't claim capital cost allowance on it, you still report the net rental income, and you can keep designating it as your principal residence for up to four years (longer for some work relocations) as long as you designate no other home and stay resident in Canada. The conditions and the filing deadline are in converting your home to a rental.
Owning multiple properties
If you own two properties and sell one, you need to decide which years to designate as principal residence for each:
| Strategy | When It Makes Sense |
|---|---|
| Designate the property with the largest per-year gain | Maximizes your total exemption across both properties |
| Calculate the per-year gain for each property | Capital gain ÷ years owned = per-year gain |
| Assign remaining years to the other property | Use the +1 bonus strategically |
Example: You own a house (10 years, $300,000 gain = $30,000/year) and a cottage (10 years, $150,000 gain = $15,000/year). Designate the house as principal residence for 9 years (covers full gain with the +1 formula) and the cottage for the remaining years.
Property flipping and the anti-flipping rule
The residential property flipping rule decides whether a quick sale is taxed as business income. Since January 1, 2023, the profit on a home in Canada you owned for less than 365 consecutive days is business income (fully taxed, with no principal residence exemption) unless the sale was due to a listed life event: death, a household change, a relationship breakdown, a threat to safety, serious illness or disability, job loss, a relocation for work or school, insolvency, or the home's destruction or expropriation. The full conditions and exceptions are in the flipping rule guide.
How the two cases compare:
| Owned less than 365 days | Owned 365+ days |
|---|---|
| Profit is business income (100% taxable) | Profit can be a capital gain (50% taxable) or exempt via PRE |
| PRE does not apply | PRE applies if conditions are met |
| No 50% inclusion rate | Standard capital gains rules apply |
When the rule doesn’t apply (you owned the home long enough, or an exception applies), the usual tests decide whether the profit is a capital gain or business income.
Calculating your capital gain
| Component | How to Determine |
|---|---|
| Proceeds of disposition | The sale price |
| Outlays and expenses | Real estate commission and legal fees on the sale |
| Adjusted cost base (ACB) | Purchase price + land transfer tax + legal fees on purchase + capital improvements (renovations that add value, not repairs) |
| Capital gain | Proceeds minus ACB minus outlays and expenses |
What counts as a capital improvement (increases ACB):
- New roof, addition, finished basement, major renovation
- Legal fees on the purchase
- Land transfer tax on the purchase
What does NOT increase ACB:
- Regular maintenance and repairs
- Property insurance, utilities, property tax
- Mortgage interest
GST/HST when selling a new home
A builder selling a newly constructed or substantially renovated home must generally charge GST/HST on the sale price. An individual who builds or substantially renovates a home to sell it, in a business or a one-off venture, counts as a builder; someone who built or renovated a home for their own or their family’s use, and later sells it, does not:
| Situation | GST/HST required? |
|---|---|
| Resale of existing home (not new/renovated) | No GST/HST |
| Sale of brand-new construction by builder | Yes — GST/HST on full purchase price |
| Substantial renovation (90% or more of the interior removed or replaced) | Yes, when sold by a builder (including someone who renovated it to sell); no for an owner who renovated it to live in |
| Sale by individual of their own primary residence | No (individual is not a builder for their own home) |
| Pre-construction assignment by original buyer | May be taxable — CRA reviews case-by-case |
Buyers of newly built homes may qualify for the GST/HST New Housing Rebate (up to $6,300 federal, phasing out for prices between $350,000 and $450,000), and first-time buyers may qualify for the separate First-Time Home Buyers’ GST/HST rebate.
Related pages
Sources
The figures and rules on this page come from these sources, last checked against them between September 23, 2026 and September 29, 2026. How we check facts.
- Canada Revenue Agency: Capital Gains – 2025
- Canada Revenue Agency: Principal residence
- Canada Revenue Agency: GST/HST New Housing Rebate
- Canada Revenue Agency: Income Tax Folio S1-F3-C2, Principal Residence
- Canada Revenue Agency: Residential Property Flipping Rule
- Department of Finance Canada: Government of Canada announces deferral in implementation of change to capital gains…
- Government of Canada: Archived - Chapter 8: Tax Fairness for Every Generation | Budget 2024
- Prime Minister of Canada: Prime Minister Carney cancels proposed capital gains tax increase