Selling Your Home: Is It Taxable? Using the Principal Residence Exemption

Conditions for the exemption, one property per family, homes that have been rented out, reporting requirements

Scott Tang, CPAUpdated 2026-11-052026 rules5 min read

If you sell the home you have lived in all along, the profit is usually not taxed — this is the principal residence exemption. But it isn't automatic: when you sell, you have to report the sale on your tax return. If your family has two properties, if the home has been rented out, or if you sell after living there for less than 12 months, the result can change.

Tax-free

If the home is designated as your principal residence for every year, the gain on the sale is usually fully exempt

One per family

A family can designate only one principal residence for each year

Must be reported

Even the sale of a principal residence must be reported and designated on Schedule 3

Under 365 days

A home in Canada held for less than 365 days, with no statutory exception, is usually taxed in full as business income, and the exemption can't be used

How the exemption is calculated

1
Work out the total gain
Selling price − cost − selling expenses
2
Count the years
The number of years of ownership designated as your principal residence
3
Apply the formula
Exempt portion = (years designated + 1) ÷ years owned × gain, up to the amount of the gain; the designated years must be years you ordinarily inhabited the home and were resident in Canada, and the "+1" generally also requires that you were a Canadian resident in the year you acquired the home
4
The rest
Taxed as a capital gain, with half included in income

The "+1" in the formula means that when you sell your old home and buy a new one in the same year, both homes can be covered.

Two properties: which one to designate

Home + cottage

You live in both at least part of the time

Only one can be designated for each year

Compare how much extra exemption each additional designated year gives on each property, and your overall tax

Usually worked out from each property's total gain and years owned, not by comparing how much each actually rose in a particular year; you don't necessarily have to designate the one you live in most

Home + rental property

The rented property generally can't be designated

Designate the home you live in

The rental property is taxed as a capital gain when sold

For tax on rental properties, see "Rental Property: Which Expenses You Can Deduct, and Whether to Claim Depreciation" in this series

Homes that have been rented out or changed use

Situation	Deemed sold at market value On the day the use changes	Elections you can make Defer the gain or keep the exemption
Your home becomes a rental	✓Usually deemed sold at market value and reacquired	✓You can elect not to be treated as having sold it (subsection 45(2)) and generally keep the home eligible for up to 4 more years; no CCA can be claimed, the rent is still reported, and your family can't designate another property for the same years
A rental becomes your home	✓Usually deemed sold at market value and reacquired	◐In some cases you can elect to defer
Renting out a small part of the home (a basement)	✕Usually not deemed sold	◐Usually no effect if the rented part is small, there are no structural changes and no CCA is claimed
Part of the home used as a home office	✕Usually no effect	◐Claiming CCA will affect it

Your home becomes a rental

🔄 Deemed sold at market value: ✓Usually deemed sold at market value and reacquired
🛡️ Elections you can make: ✓You can elect not to be treated as having sold it (subsection 45(2)) and generally keep the home eligible for up to 4 more years; no CCA can be claimed, the rent is still reported, and your family can't designate another property for the same years

A rental becomes your home

🔄 Deemed sold at market value: ✓Usually deemed sold at market value and reacquired
🛡️ Elections you can make: ◐In some cases you can elect to defer

Renting out a small part of the home (a basement)

🔄 Deemed sold at market value: ✕Usually not deemed sold
🛡️ Elections you can make: ◐Usually no effect if the rented part is small, there are no structural changes and no CCA is claimed

Part of the home used as a home office

🔄 Deemed sold at market value: ✕Usually no effect
🛡️ Elections you can make: ◐Claiming CCA will affect it

Points to watch

Not reporting can be penalized
If you sell a principal residence but don't report and designate it on Schedule 3, you may lose the exemption, and there is a penalty for a late designation ($100 a month, up to $8,000).
Who counts as a "family"
You, your spouse and your unmarried children under 18 form one family unit; together you can designate only one property for each year.
A home outside Canada can be designated too
But then you can't designate your Canadian home for the same year — see "Selling a Home in China: Is There Canadian Capital Gains Tax?" in the Cross-Border Tax series.
Be careful under 12 months
See "Selling Within 12 Months of Buying: The Residential Property Flipping Rule" in this series.
Large lots
On land larger than half a hectare, the excess usually doesn't qualify for the exemption (unless it is needed for the use and enjoyment of the home).

How Sheng Qian CPA can help

Calculate before you sell
If you have two properties, we first work out which one to designate, and for which years, for the most favourable result.
Review before changing use
Before you turn your home into a rental, or a rental into your home, we look at whether to make an election and how.
Handled properly at tax time
Schedule 3, Form T2091 and the designation handled together; for prices, see "What Sheng Qian CPA Can Do for Investors: Tax Returns, Accounts and Annual Planning" in this series.

Sources

Disclaimer

This article is general information only and is not tax advice. Everyone's situation is different; please consult a CPA about your specific arrangements. Service fees are as set out in our written quote.