Capital gains and the principal residence exemption

When you sell a property for more than you paid, the profit is a capital gain. In Canada, the gain on your principal residence is generally exempt from tax, but the rules have conditions and the sale must be reported.

The short version: your main home is usually tax-free when you sell, but you must report the sale. Other properties are taxed on half of the gain, and homes bought and sold within 365 days are generally taxed as business income.

The principal residence exemption

The exemption lets you designate one property as your main home for each year you owned it. If it is your home for every year of ownership, the gain is typically fully exempt.

• What qualifies: a house, cottage, condo, apartment, trailer or houseboat, which you own alone or jointly and in which you, your spouse or partner, or your children lived during the year. Land is usually limited to half a hectare unless more is needed to use and enjoy the home.
• One designation per family: for 1982 and later, a family can designate only one principal residence for a given year.
• The plus-one rule: if you sell one home and buy another in the same year, you can treat both as eligible for the exemption for one extra year.

You must report the sale

Since 2016, you must report the sale on your tax return, even if no tax is due. Complete Form T2091(IND) and report the disposition on Schedule 3. A late designation may be accepted in some cases, but a penalty may apply.

Other properties are taxed

Rentals, cottages and investment homes are taxed. Half of the gain, 50%, is added to your income and taxed at your marginal rate. A proposed increase to that inclusion rate was cancelled in 2025.

Flipping

Gains on homes you buy and resell within 365 days are generally treated as business income and are fully taxable, with limited exceptions such as a death, separation, job loss or disaster.

What counts in the gain

The gain is the sale price minus your adjusted cost base and selling costs. The cost base includes the purchase price, legal fees, land transfer tax and major capital improvements, but not routine repairs and maintenance. Keep records of your purchase price and major improvements.

Rental and business use

If part of your home produces income, split the sale price and cost base in a reasonable way, such as by square metres. Changing a property from a home to a rental, or the reverse, is generally treated as a sale at fair market value followed by an immediate repurchase, though elections can defer it.

Example

A cottage bought for $300,000 and sold for $450,000 has a gain of $150,000.

• Taxable amount: 50% = $75,000 added to income.
• At a 40% marginal rate, the tax is about $30,000.
• If it were your principal residence for all those years, the gain would normally be exempt.

What to do

• Decide which property is your principal residence for each year.
• Keep records of the purchase price, legal fees and major improvements.
• Report every sale of a home on your return.
• Speak with an accountant before you sell a property that is not your main home, or in a separation or move.

Tax rules can be complex, so confirm the details with the Canada Revenue Agency.

Sources: CRA: Principal residence and other real estate, Department of Finance: capital gains inclusion rate.