When you sell a home that was your principal residence for every year you owned it, the capital gain is fully exempt from tax. But if the property was only your principal residence for some of those years (rental conversions, moving in mid-ownership), only part of the gain qualifies.
The formula
Exempt ratio = (years designated + 1) / years owned. The “+1” is CRA’s acknowledgement that during a transition year you may have had two principal residences simultaneously (old and new).
What this means
A property rented for 5 years then lived in for 5 years gets (5 + 1) / 10 = 60% exemption, not 50%. Designating carefully across multiple properties during ownership transitions can save substantial tax.