Principal Residence Exemption
How the principal residence exemption works, the plus-one formula, and how to split years between a home and a cottage.
The short version
- The principal residence exemption makes the gain on your home tax-free for every year it was your family's designated principal residence.
- A family (you, your spouse or common-law partner, and your unmarried children under 18) can designate only one property per year, after 1981.
- The tax-free share of the gain is (1 + years designated) divided by years owned. The "plus one" means you need to designate all but one of the years to make the whole gain exempt.
- A home and a cottage owned at the same time compete for the same years. Give the years to the property with the bigger gain per year owned.
- Every sale must be reported on Schedule 3 and form T2091(IND), even when no tax is owed.
Principal Residence Exemption Explained
Selling your home in Canada is usually tax-free. Selling the cottage often isn't, at least not completely. The principal residence exemption decides it, and a family that owned both at the same time gets to choose how to use it. Choose well and the choice can be worth tens of thousands of dollars. Choose by gut feel and you may find out how much it was worth from your accountant, years later.
What Counts as a Principal Residence
A property can be designated for a year if all of these are true:
- It's a housing unit: a house, condo, cottage, mobile home or a share in a co-op, plus the land under it (generally up to half a hectare, more only if needed to use and enjoy the home).
- You own it, alone or with someone else.
- You, your spouse or common-law partner, your former spouse or your child "ordinarily inhabited" it at some time in the year. A cottage used only in summer can qualify.
- You were resident in Canada that year (the formula only counts resident years).
- No other property is designated by your family for the same year.
It doesn't have to be where you live most of the year. It does have to be lived in, at least part of the year, by someone in the family. A property you rent out all year and never use generally doesn't qualify.
The Formula, and Why the Plus-One Matters
| Step | Example: house owned 2010 to 2026 |
|---|---|
| Years owned (count the year bought and the year sold) | 17 |
| Years designated | 16 |
| Exempt share: (1 + 16) / 17 | 100% |
| Gain | $500,000, all tax-free |
The "1 +" exists because people often buy a new home and sell the old one in the same year, and both would otherwise fight over that year. In practice, it gives you a spare year to use on another property.
Home and cottage? Let the math pick the years
Enter both properties: purchase years, costs and values. The SmartFile finds the split of years that keeps the most gain tax-free, estimates any tax, and fills in form T2091(IND).
Home and Cottage: Who Gets Which Years?
When two properties were owned at the same time, each overlapping year can go to only one of them. The rule of thumb is to give the years to the property with the bigger gain per year owned, not the bigger gain overall.
| House | Cottage | |
|---|---|---|
| Gain | $500,000 | $300,000 |
| Years owned | 17 | 12 |
| Gain per year | about $29,400 | $25,000 |
| Best use of the years | Designate 16 years: fully exempt | Uses only the spare (plus one) years; most of the gain is taxable |
If the cottage had grown faster per year, the answer would flip, and you'd pay some tax on the house instead. Two warnings. The cottage's gain is only an estimate until you sell it, so a designation that looks best today can look wrong later. And years you designate now are gone for good. If you sell the house first, you don't have to designate every year; you can pay a little tax now to keep years for the cottage. That's a real-numbers decision. The cottage-only issues (succession, gifts to children, the 1994 election) are on cottage capital gains.
When the Exemption Is Reduced or Lost
| Situation | What happens |
|---|---|
| You turned the home into a rental (see home to rental) | A deemed sale at market value on the date of change. An election under subsection 45(2) can postpone it, and you can keep designating the home for up to four more years while it's rented, if you don't claim CCA |
| You moved into a former rental (see rental to home) | A deemed sale on the date you move in; an election under subsection 45(3) can defer the gain if you never claimed CCA on it |
| You rented a room or suite | Usually no effect, if the rental is ancillary, there were no structural changes, and no CCA was claimed |
| You ran a business from the home and claimed CCA on it | Part of the gain may be taxable |
| You owned it less than 365 days | The flipping rule: fully taxable business income, unless a life event caused the sale |
| You were non-resident for some years | Those years can't be designated |
| You bought before 1982 | Each spouse could designate a separate property for years before 1982; T2091 has an extra section |
More on the sale itself, including the flipping rule exceptions, is on selling your home and taxes. If the property was mainly a rental, see capital gains on rental property.
You Must Report the Sale
Since the 2016 tax year, every sale of a principal residence must be reported, even when no tax is owed. You tick a box in the principal residence section of Schedule 3 and complete form T2091(IND): only page 1 if you designate the home for all, or all but one, of the years you owned it; the whole form if not. Forget, and you can lose the exemption, or pay a penalty of $100 a month (up to $8,000) to designate late. Step-by-step instructions are on how to report a principal residence sale.
Rules of Thumb
- Keep every receipt for improvements (new roof, addition, renovation). They raise your cost and shrink a taxable gain. Repairs don't count.
- Owned two places at once? Work out the gain per year for each before you designate anything.
- Report every sale, even when no tax is owed.
- Write down which years you designated, and keep it with your cottage papers. Your future self, or your executor, will need it.
- Thinking of renting your home out? Read up on the 45(2) election before the first tenant moves in.
Estimate a cottage gain on the capital gains tax calculator, and see capital gains tax in Canada for how the taxable part is calculated. Everything else on property is on real estate tax in Canada.
Let the math pick the years
The home or cottage sale SmartFile finds the split of years between your properties that keeps the most gain tax-free, tells you which box to tick, estimates any tax, and fills in form T2091(IND) for you.
Can You Have Two Principal Residences?
Not for the same year, if you're a couple. Since 1982, a family unit (you, your spouse or common-law partner, and unmarried children under 18) can designate only one property per year. Two homes owned at once means choosing which one gets each year, usually the one with the bigger gain per year. The plus-one in the formula helps when you sell one home and buy another in the same year. Splitting home and cottage years: cottage capital gains.
Principal Residence Exemption Questions
What is the principal residence exemption in Canada?
A rule that makes the capital gain on your home tax-free for each year it was your family’s designated principal residence. The exempt share is (1 + years designated) divided by years owned.
Can a cottage be a principal residence?
Yes. A cottage that someone in your family ordinarily inhabited during the year, even only in summer, can be designated, but your family can designate only one property per year.
Can my spouse and I each have a principal residence?
Not for years after 1981. A family unit can designate only one property per year. Different rules applied to years before 1982.
Do I lose the exemption if I rent out my home?
Renting the whole home is a change in use and a deemed sale, but an election under subsection 45(2) can defer it and let you designate the home for up to four years while it is rented, if you do not claim CCA. Renting a small part usually has no effect.
Do I have to report the sale of my principal residence?
Yes. You must report it on Schedule 3 and form T2091(IND) for the year of the sale, even if the whole gain is exempt.
Can I have two principal residences in Canada?
Not for the same year. A family unit can designate only one property per year as its principal residence. You choose which property gets which years, and the plus-one rule helps in the year you sell one and buy another.
Sources: CRA, Income Tax Folio S1-F3-C2, Principal Residence; Principal residence and other real estate; Reporting the sale of your principal residence. Checked October 2026. Change-in-use elections have conditions and filing deadlines not covered in full here.
Last reviewed October 5, 2026 against CRA and Government of Canada sources. How we check our facts.