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

The benefit of the principal residence exemption is obvious. The gain is not subject to tax if the property has been the individual’s principal residence for the entire time it has been owned by that individual. When you normally sell a property, you are subject to tax on the gain from the sale. The gain is typically the difference between the price you paid, any improvements made, and the sale price. If the principal residence exemption applies to the sale, it would eliminate the capital gain and eliminate the need to report the sale on a tax return.

Taxpayers should keep in mind that the exemption may only remove a portion of the capital gain. If this is the case then the sale must be reported as there will be some taxes owing.


What is a Principal Residence?

A principal residence is a property where a taxpayer, his or her spouse or common-law partner, or any children live in at some point during the year. You do not have to live the majority of the year in the property to designate it as your principal residence.

An interesting tidbit is that a principal residence does not have to be located in Canada. If this situation may be of interest to you, please see information posted by the Canada Revenue Agency found here: Folio S1-F3-C2:  Principal Residence Outside Canada.

You, and your spouse are only allowed to designate one property as your principal residence in any given tax year. If the property was owned prior to 1982, you and your spouse can designate separate properties as principal residences.


Half Hectare Rule

If your principal residence is more than ½ hectare (1.25) acres of property, then the Canada Revenue Agency has stated it will only allow the ½ hectare to be considered part of the principal residence. What this means is if your principal residence resides on property larger than ½ hectare, there would be a capital gain to report on the excess property once it has been sold.

There are situations where the Canada Revenue Agency will allow more than a ½ hectare for a principal residence. Typically this is where the property cannot be subdivided.


Length of Ownership

If you have owned a property for more years then it has been your principal residence, you will have to report the sale on your tax return. Furthermore, there will be a calculation to complete to see how much principal residence exemption you are entitled to. What this means is that even though it has not always been your principal residence, you can calculate an amount that would not be included as a capital gain because the property has been your principal residence for a certain period of time.

The sale is reported on Form T2091(IND) Designation of a property as a Principal Residence by an Individual (Other Than a Personal Trust).


The Formula 

The principal residence exemption formula is as follows:

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

                   # of years home is owned

As you can see above the formula provides an extra year. This can be extremely beneficial when a taxpayer owns more than one property.


Example of principal residence exemption:

  • Taxpayer has owned their home for 20 years;
  • It has been their principal residence for 14 years; and
  • The capital gain before the exemption is $100,000.



When you own a cottage and a home for the same number of years, it can be very complicated knowing the best tax strategy for designating one, or the other as your principal residence in the year of sale.

This involves calculating the difference in tax amounts, and the values of the properties from the time of purchase to the time of sale.


CRA Resources

What is a principal residence?

Designating a principal residence

Sale of a principal residence

Changes in the use of a principal residence

Sale of farm property that includes a principal residence

Selling a building

Principal residence and other real estate

Folio S1-F3-C2: Principal Residence

Folio S1-F3-C2:  Principal Residence Outside Canada

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


Detailed Case law analysis may be found here: