Principal Residence Exemption

The principal residence exemption (PRE) can eliminate all or part of the capital gain on the sale of a home. It is one of the most valuable tax provisions available to Canadians, but since 2016 it must be claimed by reporting the sale.

WHAT IS A PRINCIPAL RESIDENCE

A housing unit (house, condominium, cottage, mobile home or houseboat), a leasehold interest, or a share in a housing co-operative.
Owned alone or jointly by the taxpayer.
Ordinarily inhabited at some time in the year by the taxpayer, a spouse or former spouse, or a child.
Includes land up to half a hectare (about 1.24 acres), more if needed for the use and enjoyment of the home.
Designated as the principal residence for the years claimed.

ONE PER FAMILY

For years after 1981, a family unit (the taxpayer, spouse or common-law partner, and unmarried children under 18) can designate only one property per year. Families with a house and a cottage must choose which property to designate for each year, typically the one with the larger gain per year.

THE FORMULA

Exempt gain = total gain × (1 + number of years designated after 1971) ÷ number of years owned. The "plus one" lets a family sell one home and buy another in the same year without losing exemption for either.

REPORTING

Report the sale on Schedule 3 and designate on Form T2091(IND) (or T1255 for a deceased person).
Failure to report can lead to a penalty of up to $8,000 and leaves the reassessment period open indefinitely.

CHANGE IN USE

Converting a home to a rental is a deemed disposition at fair market value. An election under subsection 45(2) can defer the gain and keep the property eligible as a principal residence for up to four more years while rented.
Converting a rental to a home is also a deemed disposition; a 45(3) election can defer the gain if no capital cost allowance was claimed.
Renting part of the home generally does not affect the exemption if the rental is small, no structural changes were made, and no CCA was claimed.

LIMITS

Residential property flipping: homes sold within 365 days of purchase are deemed business income and are not eligible, unless a life event applies.
Non-residents cannot designate years in which they were not resident in Canada.
Trusts can designate only in limited circumstances.