What is it?
In Canada, when you sell a home or land for more than you paid, part of the profit (the capital gain) is taxed as income. The home you actually lived in is different. The Income Tax Act removes the gain for every year you designate the home as your "principal residence". This is called the principal residence exemption (PRE).
If you can designate every year you owned the home, the whole gain is tax-free. If you can designate only some years, only that share is exempt and the rest of the gain is taxed.
The exemption is not automatic. You get it by "designating" the home on your tax return for the year you sell. The conditions and the math are below.
Which home counts as a principal residence?
Section 54 of the Income Tax Act sets the conditions. All of them must be met.
- It must be a housing unit: a house, townhouse, condo, a leasehold interest in a home, or a share in a housing co-op all qualify.
- You must have owned it in that year, alone or jointly with someone else.
- In that year it must have been "ordinarily inhabited" by you, your spouse or common-law partner (including a former one), or your child. The Act does not define this further. How much of the year you must live there follows CRA (Canada Revenue Agency) guidance, so confirm with an accountant or the CRA. A home you only rented out does not qualify.
- You must designate it as your principal residence for that year on your tax return, in the prescribed form.
- No other home may be designated for that year by your family unit (you, your spouse or common-law partner, and your minor children). Since 1982, spouses cannot each designate a different home.
- The land under and around the home normally counts only up to 0.5 hectare (half a hectare, about 1.24 acres). For more land, you must prove it was necessary to use and enjoy the home.
How is the exempt amount calculated?
Paragraph 40(2)(b) of the Income Tax Act computes the gain left after the exemption as "A − (A × B ÷ C) − D". In plain words, the share of the gain equal to "years designated ÷ years owned" is removed.
| Letter | Meaning |
|---|---|
| A | The gain as if there were no exemption (sale price − cost − expenses) |
| B | 1 + the number of years designated as your principal residence (only years you were resident in Canada, and only if you were resident in Canada in the year you bought it) |
| C | The number of years you owned the home (each year from purchase to sale counts as 1) |
| D | An adjustment for an old election (110.6(19)) that only matters for homes bought before February 23, 1994. Usually 0 |
The "1" added to B is the "plus one" rule. In the year you move, you own two homes (old and new) but can designate only one. The extra year fills that gap. You do not get it if you were not resident in Canada in the year you bought the home.
Example
Say you bought a home in 2016 for $500,000 and sold it in 2026 for $900,000, with a gain after expenses (A) of $400,000. You owned it (C) for 11 years, 2016 to 2026.
| Situation | B | Exempt (A × B ÷ C) | Taxable gain |
|---|---|---|---|
| You lived there all 11 years (all 11 designated) | 1 + 11 = 12 | $400,000 × 12 ÷ 11 → more than the gain | $0 |
| You lived there 7 years (2016–2022), then rented it out for 4 years (2023–2026) while living elsewhere (7 designated) | 1 + 7 = 8 | $400,000 × 8 ÷ 11 = $290,909 | $109,091 |
Estimates for illustration only. If a taxable gain of $109,091 remains, half of it is added to your income for the year and taxed at your rate (see "Capital gains tax"). Have an accountant do the real calculation.
You must report it on your tax return
The law gives the exemption only for years you designate "in prescribed form and manner". So even when the whole gain is exempt, you must report the sale (date, sale price, cost) and make the designation on your tax return for the year you sell.
The CRA (Canada Revenue Agency) collects this on the capital gains schedule of the return (Schedule 3) and the principal residence designation form (T2091). Form names, late-filing penalties and how to fix a missed designation can change, so confirm them on the CRA website or with your accountant.
If you leave it out, you can lose the exemption or face a penalty. Tell your accountant about the sale in the year it happens.
If you rent out the home you lived in (change in use)
Moving out and renting the home is a "change in use". Subsection 45(1) of the Income Tax Act treats this as if you sold the home at market value and bought it back, so the growth up to that day becomes a tax question. If the home was your principal residence until then, the exemption usually covers most of it.
If you file an election under subsection 45(2) with your return, the law treats you as not having started to rent it out. You can then keep designating the home as your principal residence for up to 4 more years while it is rented (section 54, paragraphs (b) and (d)). There are conditions: you cannot designate another home for those years, and you must still report the rental income. Claiming depreciation (CCA) on the building is understood to cancel the election, so decide this election only with an accountant.
Without the election, the rental years cannot be designated, and that share of the gain is taxed, like the second row of the example above.
No exemption if you sell within a year (flipping rule)
Since January 1, 2023, subsections 12(12) to (13) of the Income Tax Act contain the "flipping rule". If you own a home (or a pre-construction contract) for less than 365 days and sell it, the profit is treated as business income, not a capital gain. Business income cannot use the principal residence exemption, so the whole profit is taxed.
There are exceptions for life events listed in the law: death, separation or divorce (after 90 days apart), a relative joining your household, a threat to personal safety, serious illness or disability, a job-related move, involuntary job loss, insolvency, and destruction or expropriation of the home. See "Residential property flipping rule" for details.
Things to watch
- One home per family per year. If you use two homes, such as a house and a cottage, you must decide in the year you sell which home gets which years. A year used for one home cannot be used for the other.
- Years you were not resident in Canada do not count in B. If you owned the home before immigrating, or lived abroad for a while, tell your accountant.
- If part of the home is used as an office or rented out, that part may fall outside the exemption. How much is acceptable follows CRA guidance.
- Keep receipts for the purchase price and major improvements (capital costs). They support the gain calculation when only some years are exempt.
- If you sell your home at a loss, the loss is on personal-use property and cannot be deducted from other income (paragraph 40(2)(g)).
- This is a federal income tax rule. It is separate from land transfer tax when you buy, and from vacant home and underused housing taxes.
What the law and official sources say
Quotes are copied word for word. The "In plain words" lines are our explanation, not an official translation.
principal residence of a taxpayer for a taxation year means a particular property that is a housing unit, a leasehold interest in a housing unit or a share of the capital stock of a co-operative housing corporation … and that is owned, whether jointly with another person or otherwise, in the year by the taxpayer, if (a) where the taxpayer is an individual other than a personal trust, the housing unit was ordinarily inhabited in the year by the taxpayer, by the taxpayer’s spouse or common-law partner or former spouse or common-law partner or by a child of the taxpayer,In plain wordsA principal residence is a housing unit (including a condo, leasehold or co-op share) that you owned in the year and that you, your spouse or partner (or former one) or your child actually lived in that year.
Source: laws-lois.justice.gc.ca/eng/acts/I-3.3/section-54.html · checked Oct 30, 2026
a particular property shall be considered not to be a taxpayer’s principal residence for a taxation year (c) where the taxpayer is an individual other than a personal trust, unless the particular property was designated by the taxpayer in prescribed form and manner to be the taxpayer’s principal residence for the year and no other property has been designated for the purposes of this definition for the year … (ii) where the year is after 1981, (A) by the taxpayer, (B) by a person who was throughout the year the taxpayer’s spouse or common-law partner … (C) by a person who was the taxpayer’s child (other than a child who was at any time in the year a married person, a person who is in a common-law partnership or 18 years of age or older)In plain wordsOnly a home you designate in the prescribed form counts. And for years after 1981 (that is, from 1982), neither you, your spouse or partner, nor your minor child may have designated a different home for that year.
Source: laws-lois.justice.gc.ca/eng/acts/I-3.3/section-54.html · checked Oct 30, 2026
the taxpayer’s gain for a taxation year from the disposition of a property that was the taxpayer’s principal residence … is the amount determined by the formula A - (A × B/C) - D where A is the amount that would, if this Act were read without reference to this paragraph and subsections 110.6(19) and 110.6(21), be the taxpayer’s gain therefrom for the year, B is (i) if the taxpayer was resident in Canada during the year that includes the acquisition date, one plus the number of taxation years that end after the acquisition date for which the property is the taxpayer’s principal residence and during which the taxpayer was resident in Canada, … C is the number of taxation years that end after the acquisition date during which the taxpayer owned the property whether jointly with another person or otherwiseIn plain wordsRemaining gain = gain − gain × (1 + years designated) ÷ years owned. If you were resident in Canada in the year you bought the home, you add 1 to the years designated (the "plus one" year).
Source: laws-lois.justice.gc.ca/eng/acts/I-3.3/section-40.html · checked Oct 30, 2026
(b) where the taxpayer is a personal trust or an individual other than a trust, the taxpayer (i) elected under subsection 45(2) that relates to the change in use of the particular property in the year or a preceding taxation year, … (d) because of paragraph (b), if solely because of that paragraph the property would, but for this paragraph, have been a principal residence of the taxpayer for 4 or more preceding taxation years,In plain wordsWith a 45(2) election you can keep designating the home while you do not live in it, but this route alone cannot be used for more than 4 years.
Source: laws-lois.justice.gc.ca/eng/acts/I-3.3/section-54.html · checked Oct 30, 2026
For the purposes of this Subdivision and section 13, if a taxpayer elects in respect of any property of the taxpayer in the taxpayer’s return of income for a taxation year under this Part, (a) if subparagraph (1)(a)(i) or paragraph 13(7)(b) would otherwise apply to the property for the taxation year, the taxpayer is deemed not to have begun to use the property for the purpose of gaining or producing income;In plain wordsIf you make this election on your return, the law treats you as not having started to use the home to earn income, even though you rent it out. So the deemed sale at market value does not apply at that time.
Source: laws-lois.justice.gc.ca/eng/acts/I-3.3/section-45.html · checked Oct 30, 2026
if, absent this subsection and paragraph 40(2)(b), a taxpayer would have had a gain from the disposition of a flipped property, then throughout the period that the taxpayer owned the flipped property (a) the taxpayer is deemed to carry on a business that is an adventure or concern in the nature of trade with respect to the flipped property; … a flipped property of a taxpayer means a property … that is (a) prior to its disposition by the taxpayer, either (i) a housing unit located in Canada, or (ii) a right to acquire a housing unit located in Canada; and (b) owned or, in the case of a right to acquire, held, by the taxpayer for less than 365 consecutive days prior to its disposition, other than a disposition that can reasonably be considered to occur due to, or in anticipation of, one or more of the following events:In plain wordsSelling a home or pre-construction contract in Canada after owning it for less than 365 days is treated as a business, so the principal residence exemption (40(2)(b)) cannot be used. Life events listed in the law (death, divorce, job loss and so on) are exceptions.
Source: laws-lois.justice.gc.ca/eng/acts/I-3.3/section-12.html · checked Oct 30, 2026
Common questions
I own a house and a cottage. Are both exempt?
A family can designate only one home per year. If you really lived in both, you decide which years go to which home when you report the first sale. It is often better to give the years to the home that gained more per year, but have an accountant run the numbers.
Do I have to report the sale if the whole gain is exempt?
Yes. The law gives the exemption only for years you designate on your tax return. If you do not report the sale and the designation for the year you sold, you can lose the exemption or face a penalty. Check the forms and steps with the CRA.
My basement is rented out. Is my home still exempt?
A home you live in is your principal residence. But the part used to earn income can fall outside the exemption. Whether the whole home can still be designated follows CRA guidance, so ask your accountant.
What about a home abroad that I owned before coming to Canada?
Years you were not resident in Canada do not count in B, and if you were not resident in the year you bought it there is no "plus one" year. Separate rules may reset the value of your property when you become a resident, so confirm with an accountant and CRA guidance which period of gain is taxable.
If I sell my home at a loss, does it reduce my tax?
No. A loss on the home you lived in is a loss on personal-use property and cannot be deducted from other income or capital gains (Income Tax Act, paragraph 40(2)(g)).
Guides that use this term
Sources checked
- Income Tax Act, s. 40 — capital gains rules, 40(2)(b) principal residence exemption (laws-lois) · checked Oct 30, 2026
- Income Tax Act, s. 54 — definition of "principal residence" (laws-lois) · checked Oct 30, 2026
- Income Tax Act, s. 45 — change in use and the 45(2) election (laws-lois) · checked Oct 30, 2026
- Income Tax Act, s. 12 (12)–(14) — flipped property rule (laws-lois) · checked Oct 30, 2026