Principal Residence Exemption (PRE)
| Rule | Details |
|---|---|
| What qualifies | A housing unit you “ordinarily inhabited” during the year |
| Who can claim | Canadian residents (one per family unit per year) |
| Full exemption | If designated as principal residence for every year of ownership |
| Partial exemption | If designated for some years only (formula applies) |
| Reporting required | Yes — Schedule 3 + Form T2091 on tax return |
| Land included | Up to 0.5 hectares (1.24 acres); excess land taxable |
| “+1 rule” | Can designate for years owned +1 (helps during overlap) |
PRE Formula (Partial Exemption)
Exempt portion = (1 + years designated) ÷ years owned × capital gain
Example: Own a home for 10 years, designate it as principal residence for 7 years, gain of $200,000:
- Exempt = (1 + 7) ÷ 10 × $200,000 = $160,000 exempt
- Taxable capital gain = $40,000 × 50% = $20,000 included in income
Tax on Different Property Sales
| Property Type | Tax Treatment | Reporting |
|---|---|---|
| Principal residence (full) | 100% tax-free (PRE) | Schedule 3 + T2091 |
| Principal residence (partial years) | Partially exempt (formula) | Schedule 3 + T2091 |
| Investment/rental property | Full capital gain taxable | Schedule 3 |
| Cottage (designated as PR) | Tax-free for designated years | Schedule 3 + T2091 |
| Vacant land | Full capital gain or business income | Schedule 3 or T2125 |
| Flipped property | 100% business income (no 50% inclusion) | T2125 (business income) |
| Pre-construction assignment | Capital gain or business income | Schedule 3 or T2125 |
Capital Gains Tax Rates (2026)
| Capital Gain Amount | Inclusion Rate | Tax on $100K Gain (40% marginal rate) |
|---|---|---|
| First $250,000 | 50% | $20,000 |
| Above $250,000 | 66.67% | $26,668 per additional $100K |
Effective Capital Gains Tax by Income Level (Ontario)
| Marginal Rate | Effective Rate (50% inclusion) | Effective Rate (66.67% inclusion) |
|---|---|---|
| 20.05% (lowest) | 10.0% | 13.4% |
| 29.65% | 14.8% | 19.8% |
| 33.89% | 16.9% | 22.6% |
| 43.41% | 21.7% | 28.9% |
| 53.53% (highest) | 26.8% | 35.7% |
Selling an Investment Property
| Step | Details |
|---|---|
| 1. Calculate adjusted cost base (ACB) | Purchase price + legal fees + improvements − CCA claimed |
| 2. Calculate capital gain | Sale price − selling costs − ACB |
| 3. Report on Schedule 3 | Include in tax return for year of sale |
| 4. CCA recapture | If CCA was claimed, recapture is fully taxable as income |
| 5. Pay tax | 50%/66.67% inclusion × your marginal rate |
Investment Property Tax Example
| Item | Amount |
|---|---|
| Purchase price (2018) | $400,000 |
| Improvements | $30,000 |
| Legal/closing costs (purchase) | $5,000 |
| Adjusted cost base | $435,000 |
| Sale price (2026) | $600,000 |
| Real estate commission (5%) | −$30,000 |
| Legal costs (sale) | −$2,000 |
| Net proceeds | $568,000 |
| Capital gain | $133,000 |
| Taxable portion (50%) | $66,500 |
| Tax at 40% marginal rate | ~$26,600 |
Partial Rental Use / Home Office
| Situation | Tax Treatment | Notes |
|---|---|---|
| Rent out part of home (basement suite) | Rental portion may lose PRE | Can preserve PRE if no CCA claimed and no structural changes |
| Home office (employee) | No impact on PRE | PRE preserved |
| Home office (self-employed, no CCA) | No impact on PRE | PRE preserved |
| Home office (self-employed, CCA claimed) | CCA portion loses PRE | Avoid claiming CCA on home |
| Convert part to rental | Change-in-use rules apply | Deemed disposition on converted portion |
| Convert entire home to rental | Deemed disposition at FMV | Can elect to defer for up to 4 years |
Anti-Flipping Rule (2023+)
| Rule | Details |
|---|---|
| What it is | Homes owned less than 365 days taxed as business income (no 50% inclusion) |
| Effective | January 1, 2023 onwards |
| Impact | 100% of profit taxed as business income at full marginal rate |
| Exceptions | Death, disability, divorce/separation, workplace relocation (40+ km), personal safety threat, involuntary disposition |
| How it works | If you sell within 365 days and no exception applies, the gain is business income |
Reporting Requirements
| Form | Purpose | When |
|---|---|---|
| Schedule 3 | Report capital gains/losses | With annual T1 return |
| T2091 | Designate principal residence | With return for year of sale |
| T1255 | Elective return for deemed dispositions | When changing use |
| UHT return | Underused Housing Tax (non-residents, non-Canadians) | April 30 annually |