Principal Residence Exemption

The Principal Residence Exemption allows you to eliminate all or part of the capital gain when you sell your home, provided you designate it as your principal residence for each year you owned it. For most homeowners selling their only home, the entire gain is tax-free.

You can only designate one property as your principal residence per year (per family unit). If you own multiple properties — for example, a house and a cottage — you'll need to calculate which designation strategy produces the largest total exemption. The exemption formula is: gain × (1 + years designated) / years owned.

Since 2016, all sales of a principal residence must be reported on your T1 return (Schedule 3), even if the gain is fully exempt. Failure to report can result in the CRA denying the exemption. If you change the use of a property (e.g. from principal residence to rental), this triggers a deemed disposition that may need to be reported.