When you sell your home in Canada, the capital gain is usually tax-free — but not always, and never automatically. Here is how the rules work, when you owe tax, and what you need to report.
The principal residence exemption (PRE)
The PRE is the rule that makes your home sale tax-free. It applies when:
| Condition | Requirement |
|---|---|
| You or your family ordinarily inhabited the property | Must have lived in it — not just owned it |
| You designate it as your principal residence | Must file the designation on your tax return |
| You owned the property as an individual | Trusts and corporations have different rules |
| Only one property per family unit per year | You and your spouse/common-law partner can only designate one property per year between you |
The PRE formula
If you lived in the home for the entire period of ownership, the full gain is exempt. If the property was your principal residence for only some years, the exempt portion is calculated as:
Exempt gain = Total gain × (1 + years designated) ÷ years owned
The “+1” in the formula provides a buffer year — useful when buying and selling properties in the same year.
Example: You owned a property for 10 years and designated it as your principal residence for 7 of those years.
| Total capital gain | $200,000 |
| Exempt portion | $200,000 × (1 + 7) ÷ 10 = $160,000 |
| Taxable gain | $40,000 |
| Tax owing (50% inclusion, 40% marginal rate) | $40,000 × 50% × 40% = $8,000 |
When you DO owe capital gains tax on your home
| Situation | Why You Owe Tax |
|---|---|
| You rented out the property (without 45(2) election) | Rental period is not covered by PRE |
| You own multiple properties | Can only designate one per year — the other may have a taxable gain |
| You flipped the property | CRA may classify the gain as business income (100% taxable) rather than a capital gain |
| Property held in a corporation | PRE is not available to corporations |
| You are a non-resident | Different rules apply; withholding tax on disposition |
| Partial business use | If you used part of the home exclusively for business and claimed CCA, that portion is not exempt |
| Assignment sales (pre-construction) | Assigning a purchase contract before taking possession is generally taxed as business income |
Reporting requirements (even when tax-free)
Since 2016, you MUST report the sale on your tax return:
| Form | Purpose |
|---|---|
| Schedule 3 (Capital Gains) | Report the disposition |
| Form T2091 (Designation of a Property as a Principal Residence) | Designate the property and claim the exemption |
Penalty for not reporting: $100 per month, up to $8,000, even if the gain is fully exempt. The CRA can also reassess and deny the exemption for unreported sales, though they often grant relief if you file late voluntarily.
Capital gains inclusion rate
| Gain Amount | Inclusion Rate | How It’s Taxed |
|---|---|---|
| All capital gains, any amount | 50% | Added to income at your marginal rate |
A 2024 federal budget proposal would have introduced a 66.67% rate for gains above $250,000/year, but the increase was cancelled by the Government of Canada on March 21, 2025, and never took effect – the rate has remained 50% continuously.
Example: $400,000 taxable capital gain (not covered by PRE):
- $400,000 × 50% = $200,000 included in income, taxed at your marginal rate
Renting out your home: the 45(2) election
If you move out and rent your home, it triggers a change of use — deemed to have sold and reacquired at fair market value. But you can defer this by filing a 45(2) election:
| Without 45(2) Election | With 45(2) Election |
|---|---|
| Deemed disposition on date you start renting | No deemed disposition — continues as principal residence |
| Capital gain realized on appreciation to that date | Capital gain deferred until actual sale |
| Rental years not covered by PRE | Up to 4 additional years covered by PRE while renting |
| CCA can be claimed on rental income | Must NOT claim CCA to maintain the election |
Requirements for the 45(2) election:
- File a letter with your tax return for the year the change of use occurs
- Do not claim capital cost allowance (CCA) on the property
- Do not designate another property as your principal residence during the election period
- Maximum 4 years (can be extended if employer-required relocation)
Owning multiple properties
If you own two properties and sell one, you need to decide which years to designate as principal residence for each:
| Strategy | When It Makes Sense |
|---|---|
| Designate the property with the largest per-year gain | Maximizes your total exemption across both properties |
| Calculate the per-year gain for each property | Capital gain ÷ years owned = per-year gain |
| Assign remaining years to the other property | Use the +1 bonus strategically |
Example: You own a house (10 years, $300,000 gain = $30,000/year) and a cottage (10 years, $150,000 gain = $15,000/year). Designate the house as principal residence for 9 years (covers full gain with the +1 formula) and the cottage for the remaining years.
Property flipping and the anti-flipping rule
Since January 1, 2023, the residential property flipping rule treats profits from selling a home owned for less than 365 days as business income (100% taxable), not a capital gain:
| Owned Less Than 365 Days | Owned 365+ Days |
|---|---|
| Profit is business income (100% taxable) | Profit can be a capital gain (50% taxable) or exempt via PRE |
| PRE does not apply | PRE applies if conditions are met |
| No 50% inclusion rate benefit | Standard capital gains rules apply |
Exceptions to the flipping rule: Death, disability, separation/divorce, threat to personal safety, involuntary job relocation (40+ km), and insolvency. In these cases, the taxpayer can still claim capital gains treatment even if they owned the property for less than a year.
Calculating your capital gain
| Component | How to Determine |
|---|---|
| Proceeds of disposition | Sale price minus real estate commission and legal fees |
| Adjusted cost base (ACB) | Purchase price + land transfer tax + legal fees on purchase + capital improvements (renovations that add value, not repairs) |
| Capital gain | Proceeds minus ACB |
What counts as a capital improvement (increases ACB):
- New roof, addition, finished basement, major renovation
- Legal fees for purchase and sale
- Land transfer tax on purchase
What does NOT increase ACB:
- Regular maintenance and repairs
- Property insurance, utilities, property tax (unless rental)
- Mortgage interest