The principal residence exemption (PRE) allows Canadian homeowners to shelter capital gains on the sale of their home from income tax. If a property is designated as your principal residence for every year of ownership, the entire capital gain is exempt. If you owned the property for some years without it qualifying as a principal residence (e.g., it was rented out), a partial exemption applies, and the remaining gain is included in income at the capital gains inclusion rate (50% as of 2025).
Quick Answer
A home purchased for $400,000 in 2015 and sold for $900,000 in 2025 produces a capital gain of $500,000. If it was your principal residence for all 10 years of ownership, the entire $500,000 gain is exempt. If it was rented out for 3 of the 10 years and you did not designate those years, only 7/10 of the gain is exempt — $350,000 exempt, $150,000 taxable (at 50% inclusion, $75,000 added to income).
The Principal Residence Exemption Formula
Exempt portion of gain = Gain x (1 + number of years designated as principal residence) / total years owned
The “+ 1” in the numerator is a CRA rule that allows a one-year overlap when you sell one home and buy another in the same year — both can be designated for that year.
Example: Owned 10 years, designated as principal residence for 7 years.
Exempt % = (1 + 7) / 10 = 80%. Taxable gain = 20% of total gain.
What Qualifies as a Principal Residence
A property qualifies as a principal residence for a year if:
– It is a housing unit (house, condominium, cottage, mobile home)
– You (or your spouse, common-law partner, or dependent child) normally inhabited it at some time during the year
– You designate it as your principal residence for that year on Form T2091 when you sell
Only one property per family unit can be designated as a principal residence for any given year. If you own two properties (e.g., a primary home and a cottage), you must allocate designation years among them to maximize the combined exemption.
Renting Out Your Home and the PRE
If you rent out a portion of your principal residence (e.g., a basement suite), the entire property may still qualify as a principal residence if you do not claim CCA on the rental portion and the rental use does not change the overall use of the property. Renting out the entire home for extended periods disqualifies those years from the designation.
Change of use election: If you move out and rent the entire home, the property changes use from personal to income-producing. You can elect under ITA section 45(2) to defer the deemed disposition and continue treating the property as your principal residence for up to 4 additional years while it is rented — without claiming CCA during those years.
Verified Against Source
The principal residence exemption is set under ITA section 40(2)(b) and the definition of “principal residence” in ITA section 54. Form T2091 (Designation of a Property as a Principal Residence by an Individual) must be completed in the year of sale. Source: canada.ca/en/revenue-agency/services/forms-publications/forms/t2091.html and CRA Guide T4037 (Capital Gains).
Frequently asked questions
- What is the principal residence exemption in Canada?
- The principal residence exemption (PRE) shelters capital gains on the sale of a Canadian home from income tax. If a property is designated as your principal residence for every year of ownership, the full capital gain is exempt. Partial exemptions apply if the property was not your principal residence for all years owned.
How is the principal residence exemption calculated?
Exempt fraction = (1 + years designated as principal residence) / total years owned. Multiply this by the total capital gain to get the exempt portion. The remaining gain (if any) is a taxable capital gain subject to the 50% inclusion rate. The '+1' rule accommodates the year you buy a replacement home.
Do I have to report the sale of my home to CRA?
Yes, since 2016. You must report the sale of your principal residence on your T1 return in the year of sale, even if the full gain is exempt. Use Schedule 3 (Capital Gains) and Form T2091 (Designation of a Property as a Principal Residence). Failure to report may result in CRA denying the exemption.
Can I claim the PRE on a cottage or vacation property?
Yes. A cottage, vacation property, or other housing unit can qualify as a principal residence for years in which you (or a family member) normally inhabited it. However, only one property per family unit can be designated per year. You must allocate years between your primary home and cottage to maximize the combined exemption.
What happens if I rented out part of my home?
If you rent out a portion of your home (e.g., a basement suite or a room) while continuing to occupy the rest, the property may still qualify as a principal residence for those years — provided you do not claim CCA on the rental portion and the rental use is incidental to the overall residential use. Renting out the entire home for a year generally disqualifies that year from the PRE.
What is the section 45(2) election?
If you move out and rent your entire home, the property normally changes use from personal to income-producing (triggering a deemed disposition). Under ITA section 45(2), you can elect to defer the deemed disposition and continue to designate the property as your principal residence for up to 4 more years after you stop living in it — as long as you do not claim CCA during those rental years. File the election with your T1 for the year of the change of use.
How many years of PRE designation can I give to a cottage?
You can give any number of years to a cottage, but those years cannot also be given to your city home. The optimal split maximizes total tax savings across both properties. If both properties appreciated at different rates, give more designation years to the property with the higher per-year gain.
Is there a limit on how much gain is exempt?
No dollar limit applies. The entire capital gain on a principal residence is exempt if all years are designated. A $2 million gain on a home owned and lived in for 20 years is fully exempt with a proper T2091 designation. There is no cap on the exemption amount.
What is Form T2091?
Form T2091 (Designation of a Property as a Principal Residence by an Individual) is filed in the year you sell the property. It specifies the property address, years of ownership, number of years designated as principal residence, and the calculated exempt and taxable portions of the gain. The form is filed with your T1 return for the year of sale.
What if I forgot to report the sale of my principal residence?
File an adjustment (T1ADJ or ReFILE) for the year of the missed sale. CRA will apply a late-designation penalty: $100 per month the designation was not filed, up to a maximum of $8,000. The exemption itself is not lost — CRA can accept late designations — but there is a penalty for the late filing.
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