Selling a home in Canada involves crucial tax considerations – particularly the principal residence exemption (PRE), which can eliminate or reduce capital gains tax on the sale of a qualifying principal residence. If a property meets the principal residence criteria for the years you owned it, the resulting capital gain can generally be excluded from your taxable income. This guide explains the PRE rules, how to claim the exemption correctly, the reporting obligations, key qualification requirements, partial‑exemption scenarios, and common CRA audit triggers related to real estate. Understanding these rules helps you avoid costly mistakes and stay compliant.
What is the Principal Residence Exemption?
The PRE is an income‑tax mechanism that can exempt the capital gain realized on the sale (or deemed sale) of your principal residence, provided the conditions are met. Broadly speaking, the exemption applies for each year the property is designated as your principal residence. For 2016 and later years, your return must include basic information (year of acquisition, proceeds, and a description) on Schedule 3; for 2017 and later, individuals also complete Form T2091(IND).
Only one property per family unit per year.
For 1982 and later years, you can designate only one home as the principal residence of your family unit – generally you, your spouse or common‑law partner, and unmarried children under 18 – for each tax year. If you own, for example, a city home and a cottage, only one may be designated for a given year. Planning the designation across years can help maximize the exemption.
Who must live there and what qualifies as a property?
You must own the property (alone or jointly), and it must be ordinarily inhabited at some time during the year by you, your spouse/common‑law partner (current or former), or your child. Short periods of occupancy can be enough. Qualifying properties include a house, condominium, cottage, an apartment (including in a duplex), a trailer/mobile home or houseboat, a leasehold interest in a housing unit, and a co‑op share acquired to secure a right to inhabit a unit. Land counts too, but generally only up to ½ hectare (1.24 acres) unless more is necessary for the use and enjoyment of the residence (e.g., municipal minimum lot size).
CRA Principal Residence Reporting Obligations
For 2016 and later tax years, a sale of your principal residence must be reported on Schedule 3 to claim the exemption. For 2017 and later, individuals must also include Form T2091(IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust). Additionally, there is Form T1255 – this form is intended exclusively for use by the legal representative of a deceased individual.
CRA will allow the PRE only if the disposition and designation are reported as required. If you forget to designate, ask CRA to amend your return; late designations can be accepted, but the penalty is the lesser of $8,000 or $100 per complete month from the original due date to the date CRA receives a satisfactory request.
Principal Residence Designation & Residency
To claim the exemption on sale, designate the property as your principal residence for each year you wish to shelter, and ensure no other property was designated by anyone in your family unit for those years. In general, a year can be included in the formula only if you were resident in Canada at some time during that year.
CRA Real‑Estate Audits and Common Triggers
- Frequent sales / flipping:
Effective January 1, 2023, gains on dispositions of a housing unit or a right to acquire one (e.g., an assignment) held for less than 365 days are deemed business income (no PRE; loss deemed nil) unless a listed life‑event exception applies. Even beyond 12 months, CRA may assess business income depending on intent and conduct.
- Multiple designations / ineligible use:
A common issue is attempting to designate multiple properties for the same year within a family unit, or claiming PRE on a property that was not ordinarily inhabited (e.g., held mainly for rental/investment despite brief occupancy). The onus is on the taxpayer to support the designation with facts.
- Unreported gains or rental income:
Dispositions must be reported. CRA also targets unreported assignment sales and unreported rental income (for suites or secondary properties).
- GST/HST and new‑home rebates:
If you buy or build a new or substantially renovated home and claim the GST/HST New Housing Rebate, CRA may verify that it was intended as your (or a relation’s) primary place of residence. In some cases, if you’re effectively a “builder” for GST/HST purposes (e.g., you built with an intention to sell), you must collect/remit GST/HST on the sale.
Need Help? Contact Taxpayer Law for Assistance
Navigating the principal residence exemption and related tax rules can be nuanced. Taxpayer Law – a team of experienced Canadian tax lawyers located in Toronto and Ottawa – can assist with your tax dispute with the CRA, collections and voluntary disclosure matters. Contact us for a confidential consultation.
