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Principal Residence Exemption (PRE)

Income Tax Act s. 40(2)(b), s. 54

When a principal residence is sold, the gain is not taxable if it has been the person's principal residence for the whole time it has been owned.  This is because the principal residence exemption eliminates the capital gain.  In years prior to 2016, there was no need to report the sale on your tax return if the entire gain was eliminated.  However, on October 3, 2016 the federal government announced that, starting with the 2016 tax year, the sale of a principal residence must be reported on Schedule 3 of the tax return (see below for more filing information), in order to claim the principal residence exemption.  This change applies also for deemed dispositions, such as a deemed disposition due to change in use of the property.

Two other major changes to the Income Tax Act (ITA) regarding the reporting of the disposition of a principal residence:

bulletCanada Revenue Agency (CRA) can, according to new ITA s. 152(4)(b.3), reassess a taxpayer outside of the normal reassessment period, if the taxpayer does not report a disposition.  Normally for individuals the reassessment period is 3 years from the date of the initial notice of assessment, with some exceptions.
bulletIf the disposition of the principal residence is reported late, a late-filing penalty can be imposed @ $100 per month x the number of months late, to a maximum of $8,000.  New ITA s. 220(3.21) is added to this effect.

Residential Property Flipping Rule

The Federal 2022 Budget brought in the new Residential Property Flipping Rule

Profits on the sale of residential property are fully taxable as business income, not capital gains, and no principal residence exemption will be allowed for residential property owned for less than 12 months.

The property flipping rule applies to properties sold on or after January 1, 2023.

Residential properties held for less than 12 months and sold at a loss will not be eligible for a deduction for a non-capital loss, unless in the absence of the property flipping rule the disposition would have resulted in a non-capital loss.

There will be exemptions for certain life events.

See Residential Property Flipping Rule on the Department of Finance website, which includes a list of life events that would provide exemptions to the rule.

Residential Property Held for at Least 12 Months

This does NOT mean that selling a residential property that has been held at least 12 months will automatically not be viewed as a case of property flipping.  Other provisions of the Income Tax Act, which already make property flipping taxable as business income, will still apply to those sales.

The intent when a taxpayer purchases residential property will still determine whether the transaction will be business income or not.  This will include whether the houses were being purchased or built with the goal of reselling and making a profit.

See also our article on Taxation of Real Estate Sales.

What is a Principal Residence?

To designate a property as the principal residence, it does not have to be the place where the taxpayer lives all the time.  The property will qualify as a principal residence if the taxpayer, taxpayer's current or former spouse or common-law partner, or any of the taxpayer's children lived in it at some time during the year.  If the home is rented out the situation may change.  See the information below re change in use.

If the home is lived in by or rented to the taxpayer's child, it can still qualify as the taxpayer's principal residence.  This might happen if the taxpayer enters long-term care and is unable to return home to live.  See

bulletTechnical interpretation 2016-0625161C6 Main residence inhabited by a child, and
bulletAdvisor's Edge article - Renting to a child while living in long-term care

Location of the Principal Residence

As mentioned in the March 2016 Life in the Tax Lane video, the principal residence does not have to be located in Canada.  They point out that if you purchased a vacation property in the US, then you could designate it as your principal residence for years in which you resided there at some time during the year.  Check out the video for more information, as well as the CRA Folio S1-F3-C2:  Principal Residence Outside Canada.  When a non-resident becomes a Canadian resident, at that time they are deemed to have disposed of and reacquired any capital property owned.  Thus, any capital gains will be determined only on the change in value in Canadian $ after they become a Canadian resident.

One Principal Residence Per Couple

A taxpayer and spouse or common-law partner may only designate one principal residence between them for each tax year after 1981.  For years prior to 1982, each individual taxpayer can designate one principal residence, so if a couple has owned both a primary home and a cottage for decades, the principal residence exemption is available for both homes for the years prior to 1982.

Calculating Gain on Sale of Principal Residence

The increase in value of the home from time of purchase is used to calculate the gain before deducting the principal residence exemption.  If a home has been owned since before 1972, only the increase in value since December 31, 1971 (V-Day Value) is used to calculate the gain before deducting the principal residence exemption.

Property In Excess of 1/2 Hectare

S. 54 of the Income Tax Act provides the definition of principal residence.  Paragraph (e) of the definition states that if there is more than 1/2 hectare (1.25 acres) of property, only 1/2 hectare of the land can be considered part of the principal residence, unless the taxpayer establishes that the excess land was necessary to the use and enjoyment of the housing unit as a residence.

Relevant Court Case:

Cassidy v. The Queen 2010 TCC 471

bullet2.43 hectare property which was not subdividable when purchased
bulletIn 2003 the property was able to be rezoned due to a change in the "Official Plan".
bulletThe sale of the property was made in 2003, subject to the land being rezoned.
bulletMr. Cassidy did not report the disposition as he thought the entire gain was eligible for the PRE.
bulletCRA reassessed Mr. Cassidy in 2006, and denied the PRE on the excess land.

However, The Tax Court decision was overturned by the Federal Court of Appeal in Cassidy v. Canada 2011 FCA 271.  The Court explained that the determination of whether the property meets the definition of "principal residence" of the taxpayer is done for each year that the property is owned.  The decision was that Mr. Cassidy was entitled to the PRE for the full amount of his capital gain on the house and the 2.43 hectares of land.

Adding a Child to the Title of a Principal Residence

A parent may want to change the title of their principal residence so that a son or daughter will have joint ownership with right of survival (JWROS).  There may be many reasons for someone to want to do this, but a couple may:

bullethave fear of somehow being swindled out of their home
bulletbe trying to avoid probate fees upon death

There can be pitfalls to this! See our article about minimizing probate fees, joint ownership of assets, and beneficial ownership vs legal ownership.

Beneficial Ownership - Residential Property

In 2009, a technical interpretation, TI 2009-0324851I7 Beneficial Ownership - Residential Property, was issued by CRA which indicated that beneficial ownership of real property could be held by one person, even though legal title was held by another person.  The beneficial owner and the legal owner had sufficient documentation to prove that this was the case.  The beneficial owner was able to claim the principal residence exemption when the property was sold.

Reporting the Principal Residence Sale on Your Tax Return

As indicated above, there is a penalty of up to $8,000 for a late-filing penalty.  If you fail to report the sale of your principal residence at all, you may be taxed on the capital gain.

For 2017 and later taxation years, Form T2091(IND) Designation of a property as a Principal Residence by an Individual (Other Than a Personal Trust) (T1255 for a deceased taxpayer) must be filed for all principal residence disposals, as indicated on Schedule 3.  However, if your home was your principal residence for the whole time that you owned it, only page 1 of the T2091 has to be completed, not the pages where the proceeds and adjusted cost base are reported.

In the Designation section on the T2091 you must enter the number of tax years ending after the acquisition date for which the home was your principal residence.  Thus, if you purchased the residence in December 2016, sold it in January 2019, and it was your principal residence for the whole time, the number you enter will be 4 tax years (ending 2016, 2017, 2018 and 2019).

If you are using tax software, you will probably have to go to the Principal Residence Designation Worksheet and tick the box that asks "Was this your principal residence for all the years since acquisition?"  And, perhaps depending on the software, you may have to enter the proceeds of disposition on that worksheet in order for the information that it was your principal residence to flow through to the bottom of Schedule 3 Line 17900 (line 179 prior to 2019).  Do not enter the proceeds and ACB on Schedule 3.  If your entire gain is not eliminated by the Principal Residence Exemption, then both the proceeds and cost must be entered on the worksheet, and this will flow through to Schedule 3.

If there is more than one owner, each will report the sale on Schedule 3 and the T2091, using only their share of the proceeds and cost basis when this information is required.  For instance, when a home is owned jointly by a couple and each owns 50%, each will report 50% of the proceeds on Schedule 3 or the T2091, depending on the taxation year, and depending on whether this information is required.

For the 2016 taxation year, Form T2091 only had to be filed if your home was not your principal residence for the whole time that you owned it.  This form requires input of the proceeds, adjusted cost base, outlays and expenses related to the sale, and other information required to calculate the capital gain.

For taxation years prior to 2016, Folio S1-F3-C2 paragraph 2.15 indicates that the T2091 must be filed if:
     - a taxable capital gain on the disposition of the property remains after using the principal residence exemption formula, or
     - for T664 or T664(Seniors), Election to Report a Capital Gain on Property Owned at the End of February 22, 1994 was filed regarding the property by the taxpayer, the taxpayer's spouse or common-law partner, and the property was the taxpayer's principal residence for 1994, or it was designated in the year as the principal residence for any tax year.

Principal Residence Exemption Formula

The principal residence exemption calculation formula is:

(# of years home is principal residence + 1)  x capital gain
                   # of years home is owned

The extra year in the top of the equation (the "one-plus rule") means that when a person moves, both the old home and the new home will be treated as a principal residence in the year of the move, even though only one of them can actually be designated as such for that year.  For dispositions occurring after October 3, 2016, the "one-plus" factor applies only where the taxpayer is resident in Canada during the year in which they acquire the property.  On Schedule 3 of the 2016 tax return, in the section titled "Principal Residence Designation", you can tick #1 to designate the property to have been your principal residence for all the years owned.  If you sold your principal residence in 2016 and purchased another one, by ticking #1 you are designating the property as your principal residence for all years including the year of sale (or for all years except one year), and you will not have to complete Form T2091(IND) - but for the 2017 and later taxation years the T2091 still must be completed.  CRA indicates that you should keep your decision in writing for future reference, especially for when property #2 is sold.  See Disposing of your principal residence on the CRA website for more information.

Example of principal residence exemption calculation:

bullettaxpayer has owned their home for 20 years
bulletit has been their principal residence for only 14 years
bulletthe capital gain before the exemption is $100,000
bulletthe taxpayer was a Canadian resident in the year the property was acquired

The exemption amount is (14 + 1)/20 x 100,000 = $75,000, leaving a capital gain of $25,000, and a taxable capital gain (50%) of $12,500.

Example of principal residence exemption calculation when 2 homes owned:

bullet 1st home purchased in 2003
bullet 2nd home purchased in 2010
bullet 1st home sold in 2015 for $100,000 gain, claimed principal residence exemption for 2003 to 2010 (8 years)
bullet 1st home was owned for 13 years (2003 to 2015 inclusive)
bullet 2nd home sold in 2017 for $150,000 gain, claimed principal residence exemption for 2011 to 2017 (7 years)
bullet 2nd home was owned for 8 years (2010 to 2017 inclusive)
bullet the taxpayer has always been a Canadian resident
bullet both homes can qualify as principal residence in each year owned

The exemption amount when the 1st home is sold is (8 + 1)/13 x $100,000 = $69,231, leaving capital gain of $30,769.

The exemption amount when the 2nd home is sold is (7 + 1)/8 x $150,000 = $150,000, leaving no capital gain.

Cottage as a Principal Residence

If you have both a home and a cottage, and sell one of them at a profit, you must make a decision as to whether to designate the sold property as your principal residence for some or all of the years it was owned.  If you sell a cottage that you have owned for 10 years, you could designate the cottage as your principal residence for the entire 10 years in order to eliminate capital gains tax, as long as you have not designated any other property as your principal residence during that time, and as long as you have not used the cottage to generate income - see article below.

This would mean that when you sell your home you will likely be paying capital gains tax, as you cannot also designate the home as your principal residence for those 10 years.  If you have a significant gain so far on your home but a small gain on the sale of the cottage, it might be best to save the exemption for the sale of your home.

If you had sold a previous home at a gain say 4 years prior to selling the cottage, and did not declare the sale for capital gains purposes, then you can only claim the cottage as your principal residence for a maximum of 4 years.  This is because you were deemed to have claimed the principal residence exemption when you sold the previous home.

Change in Use of Home

See also our article regarding a change in use of your home from principal residence to income producing, or from income producing to principal residence.  How you do things may affect whether or not you have to report a capital gain.

Principal Residence Exemption Education Letters

See the Video Tax News information on the CRA education letters that were sent out in February 2022, advising that the taxpayer return should be reviewed and adjusted if necessary.  This is also discussed in the March 2022 Life in the Tax Lane video from Video Tax News.

Death of a Taxpayer / Loss on Residence Sold by Estate

Income Tax Act s. 40(2)(g)(iii), 54, 164(6)

When a taxpayer dies, there is a deemed disposal of the principal residence, which is considered personal use property (PUP), at fair market value.  This may result in a capital gain at the date of death, which may be partially or completely eliminated by the principal residence exemption.  The fair market value becomes the new adjusted cost base for the residence.  The eventual sale of the residence by the estate may result in a capital gain or capital loss.

See Principal residence - deceased vs. estate by John Oakey of Baker Tilly Canada, for discussion of the tax treatment when there is a subsequent capital loss on the sale of the residence by the estate.

See also Technical Interpretation 2008-0280751E5 - Deceased taxpayer's residence sold by his estate.

Tax Tip:  Get professional advice on this! Resources

Real Estate Sales - Are They Taxable? What About My Principal Residence?

Tax Implications of Owning a Cottage or Second Home

Tax Court Cases

Lamothe v. Quebec Revenue Agency 2022 QCCQ 1527 (CanLII) - real estate broker built, lived in, and then sold a short time later, 3 houses within a 7 year period.  The only sale in question was the 3rd home, and the court found in favour of the real estate broker.  This is discussed in the Life in the Tax Lane June 2022 video from Video Tax News.

Wall v. The Queen, 2019 TCC 168, discussed in the Life in the Tax Lane October 2019 video - 4 properties sold over 5 years.

Hansen v. The Queen, 2020 TCC 102 discussed by Advotax Law - 5 houses bought and sold over 6 years.

Canada Revenue Agency (CRA) Resources

Income tax information you need to know if you bought or sold a home

Schedule 3 - Capital Gains (or Losses)

Form T2091(IND) Designation of a property as a Principal Residence by an Individual (Other Than a Personal Trust)  

T2091(IND)-WS Principal Residence Worksheet

Form T1255, Designation of a Property as a Principal Residence by the Legal Representative of a Deceased Individual

Principal residence and other real estate

Folio S1-F3-C2: Principal Residence

Folio S1-F3-C2:  Principal Residence Outside Canada

Reporting the sale of your principal residence for individuals (other than trusts) - more information on the 2016 reporting change

Revised: October 01, 2022


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