Selling Your Home: Principal Residence Exemption Rules in Canada

The principal residence exemption can reduce or eliminate the capital gain when you sell an eligible property. It is one of the most valuable tax provisions available to homeowners, but it is not automatic: the property must meet specific conditions, and the sale must be reported.

Here are the main rules to consider before selling a house, condo or cottage.

What qualifies as a principal residence?

Under the Income Tax Act, an individual may designate an eligible property as their principal residence for certain years of ownership. The exemption can then reduce or eliminate the capital gain on its sale.

Eligibility depends on the type of property, ownership, how it was used and the years for which it is designated.

1. The property must be an eligible housing unit

An eligible property may be:

• a detached house;

• a condo or apartment;

• a unit in a duplex;

• a cottage;

• a mobile home or trailer;

• a houseboat; or

• certain interests in a housing unit, such as a leasehold interest or a share in a housing co-operative.

A property does not have to be your year-round home to qualify. A cottage may be eligible for certain years if the other conditions are met.

2. You must own the property

To claim the exemption, you must own the property, either alone or with someone else. For example, spouses who jointly own a home may each have an ownership interest that qualifies under the principal residence rules.

3. Someone in your family must ordinarily inhabit it

In a year for which you designate the property, it must generally have been ordinarily inhabited by you, your current or former spouse or common-law partner, or one of your children.

You do not necessarily have to live there throughout the year. Even a relatively short stay may qualify, depending on the circumstances. However, briefly using a property mainly held to earn income may not be enough. The facts matter, particularly for cottages and other secondary residences.

4. The surrounding land may qualify, subject to limits

The exemption can extend to land around the housing unit. Generally, up to one-half hectare of adjacent land may be included if the other conditions are met.

A larger area may qualify if you can show that the additional land was necessary for the use and enjoyment of the residence. For example, minimum lot-size rules or restrictions on subdividing the property may be relevant.

5. You must report the sale and designate the property

Even if the entire gain is exempt, you must report the disposition and designate the property on your federal income tax return to claim the exemption.

Québec has its own reporting requirements, including the Designation of Property as a Principal Residence form. Tax planning specialists can help you complete the applicable federal and Québec filings.

What if you own both a home and a cottage?

Generally, a family unit can designate only one property as its principal residence for a given year. The family unit rules can affect spouses or common-law partners and their children.

If you own both a house and a cottage, deciding which property to designate for each eligible year may affect the tax payable when either property is sold. Properties acquired before 1982 can raise additional questions under the older rules.

Selling within a year of purchase? Canada’s residential property flipping rule may treat the profit as business income if you owned the property for less than 365 consecutive days and no exception applies. In that case, the principal residence exemption cannot shelter the profit.

Check your eligibility before selling

Selling a house, condo or cottage must be reported even when you expect the gain to be fully exempt. If you have owned more than one eligible property, your choice of designation can also affect a future sale.

Before completing the transaction, Mallette’s tax professionals can review your property’s eligibility, calculate the potential capital gain and help you assess the designation that best fits your circumstances.