Principal Residence Exemption Basics
What It Is
| Feature |
Details |
| Purpose |
Exempt home sale gain from tax |
| Result |
Pay no capital gains tax |
| Requirement |
Must be your principal residence |
Why It Matters
| Without PRE |
Example |
| Buy home for |
$400,000 |
| Sell for |
$700,000 |
| Capital gain |
$300,000 |
| Taxable (50%) |
$150,000 |
| Tax at 30% |
~$45,000 |
With PRE: $0 tax.
Qualifying as Principal Residence
Requirements
| Requirement |
Details |
| Housing unit |
House, condo, mobile home, etc. |
| Owned by you |
Individual, not corporation |
| Ordinarily inhabited |
You or family lived there |
| Designated |
You choose to designate it |
“Ordinarily Inhabited”
| Factor |
Counts |
| Actually lived there |
Yes |
| Short-term occupancy |
Can count |
| Seasonal/summer use |
Can count |
| Never occupied |
Does not qualify |
Family Unit
| Includes |
|
| Yourself |
Always |
| Spouse/partner |
Yes |
| Minor children |
Yes |
| One PRE per family unit |
Per year |
The “+1” Rule
How the Exemption Works
| Formula |
|
| Exempt gain = |
Total gain × (1 + years designated) ÷ years owned |
The “+1”
| Purpose |
|
| Buy and sell in same year |
Still get exemption |
| Bonus year |
Built into formula |
Example
| Scenario |
|
| Owned |
10 years |
| Designated |
10 years |
| Exempt |
(1 + 10) ÷ 10 = 110% = fully exempt |
Partial Exemption
| Scenario |
|
| Owned 20 years |
|
| Designated as PRE |
15 years |
| Exempt portion |
(1 + 15) ÷ 20 = 80% |
| Capital gain |
$200,000 |
| Exempt |
$160,000 |
| Taxable |
$40,000 |
Multiple Properties
Choosing Which to Designate
| Strategy |
|
| Can only designate one per year |
Per family unit |
| Choose the one with larger gain |
Usually |
| Consider future appreciation |
Long-term planning |
Example: Two Properties
| Property |
Buy |
Sell |
Gain |
| House |
$400K |
$700K |
$300K |
| Cottage |
$200K |
$350K |
$150K |
If owned both 10 years:
- Designate house all 10 years → House fully exempt, cottage taxable
- Or split designation strategically
Optimization
| Consider |
|
| Which gained more? |
Exempt the larger gain |
| Which held longer? |
“+1” matters more for short holds |
| Future plans |
What you’ll sell when |
Reporting Requirements
Since 2016
| Requirement |
|
| Report sale |
On tax return |
| Even if fully exempt |
Still report |
| Forms needed |
Schedule 3, T2091 |
Penalties for Not Reporting
| Failure |
Consequence |
| Not reporting |
$8,000 penalty possible |
| Late reporting |
May still claim, but penalties |
What to Report
| Information |
|
| Date of acquisition |
When you bought |
| Proceeds of disposition |
Sale price |
| Description |
Address |
| Designation |
Years designated |
Change in Use Rules
What Triggers “Change in Use”
| Event |
|
| Move out and rent it |
Deemed disposition |
| Start running business |
Partial change |
| Convert to rental |
Taxable event |
Deemed Disposition
| When Moving Out |
|
| Deemed to sell at FMV |
Capital gain to that point |
| Deemed to reacquire |
At same FMV |
| Future gains |
Different treatment |
Section 45(2) Election
| Election |
|
| Make within deadline |
With return |
| Effect |
Avoid deemed disposition |
| Can designate |
Up to 4 more years as PRE |
| Even if rented |
Still claim PRE |
Example
| Scenario |
|
| Buy home 2020 |
$500,000 |
| Move out, rent in 2025 |
Value $700,000 |
| Without election |
$200K gain triggered |
| With 45(2) election |
No gain, continue PRE up to 4 years |
Land Size Limits
Half-Hectare Rule
| Land |
Treatment |
| Up to 0.5 hectare |
Fully exempt with building |
| Over 0.5 hectare |
Excess must be necessary |
“Necessary” Excess Land
| May Qualify If |
|
| Minimum lot size requirement |
Municipality rules |
| Septic/well needs |
Rural properties |
| Cannot subdivide |
Restrictions |
Major Renovations
Adding Value vs. Maintenance
| Type |
ACB Treatment |
| Capital improvements |
Add to ACB |
| Repairs/maintenance |
Not added |
This Matters If
| Situation |
|
| Partial exemption |
Higher ACB = lower gain |
| Change in use |
Affects deemed gain |
Special Situations
Renting Part of Home
| Scenario |
Treatment |
| Less than 50% rented |
Usually OK |
| No structural changes |
Usually OK |
| Claim CCA on rental portion |
May disqualify |
Working from Home
| Minor Use |
|
| Home office |
Usually no impact |
| Don’t claim CCA |
Preserves PRE |
Flipping Houses
| CRA View |
|
| Frequent flipping |
Business income |
| Not capital gain |
No PRE |
| Subject to full tax |
100% taxable |
Anti-Flipping Rule (2022+)
| Rule |
|
| Own less than 12 months |
Taxed as business income |
| Some exceptions |
Job relocation, death, etc. |
| No PRE |
If anti-flipping applies |
Non-Residents
If Leaving Canada
| Event |
|
| Become non-resident |
Deemed disposition |
| Can elect to defer |
Until actual sale |
| PRE available |
For Canadian years |
Returning to Canada
| Timing |
|
| Reacquire property |
Different rules |
| Complex |
Get professional advice |
Tax Planning
Strategies
| Strategy |
Purpose |
| Maximize designation years |
Full exemption |
| File 45(2) election |
When renting out |
| Track ACB |
For partial exemption |
| Plan for multiple properties |
Optimize designations |
What to Keep
| Records |
|
| Purchase documents |
Original cost |
| Improvement receipts |
For ACB |
| Years occupied |
Designation support |
Common Mistakes
Avoid These
| Mistake |
Consequence |
| Not reporting sale |
$8,000+ penalty |
| Claiming CCA on home |
May lose PRE |
| Not filing 45(2) election |
Taxable deemed disposition |
| Overusing on second property |
First home loses exemption |