Principal Residence Exemption in Ontario: How It Works and What You Must Report

The principal residence exemption (PRE) lets you reduce or eliminate the capital gain when you sell a home that qualifies. A property can qualify if it is a housing unit, leasehold interest, share of a co-operative housing corporation, or similar property that you owned and that you, your spouse or common-law partner, or your child ordinarily inhabited during the year. You do not need to live there all year, but the property must be ordinarily inhabited by you or your family at some point in the year.

The exemption covers the home and the land under it, generally up to half a hectare (about 1.24 acres), unless you can show more land was necessary for the use and enjoyment of the home.

For years after 1981, only one property per "family unit" can be designated as a principal residence for any year. A family unit generally means you, your spouse or common-law partner, and your children under 18. If your family owns a house and a cottage, you must choose which one to designate for each year, and the choice can change from year to year.

The gain that is exempt is generally worked out with a formula that takes the number of years the property is designated as your principal residence, plus one, divided by the number of years you owned it. The "plus one" year helps when you buy a new home in the same year that you sell the old one. The extra year is generally not available if you were not a Canadian resident in the year you acquired the property.

Before 2016, you generally did not report the sale of your home if the whole gain was exempt. That changed. For sales on or after January 1, 2016:

• You must report the sale on Schedule 3 (Capital Gains) of your T1 return, with the date you acquired the property, the proceeds, and a description of the property.
• For sales in 2017 and later, you must also complete Form T2091 (IND), Designation of a Property as a Principal Residence by an Individual, to designate the years.
• If you do not report the sale and designate the property, the CRA will generally not allow the exemption.
• A deceased person's legal representative uses Form T1255 instead of Form T2091 (IND). Personal trusts use Form T1079.

If you forgot to report a sale, you can ask the CRA to amend the return for that year. The CRA can accept a late designation in some circumstances, but a penalty may apply. The penalty is the lesser of $8,000 or $100 for each complete month from the original filing deadline to the date of your request. The CRA said it would assess this penalty only in the most excessive cases for sales in 2016 and 2017, so check what the CRA says now before assuming it will waive it.

• Short stays. If you only lived in the property briefly, the CRA may question whether it was "ordinarily inhabited". The facts matter, such as your address on your driver's licence and bills, and your reasons for moving.
• The flipping rule. A home sold within 365 days of purchase may be a "flipped property" and taxed as business income, so the exemption generally does not apply. See the residential property flipping rule.
• Change of use. If you move out and rent the home, the CRA can treat the change as a sale at fair market value. Elections may be available, and claiming capital cost allowance (depreciation) on the home can affect the exemption.
• A business in the home. Using a large part of the home mainly to earn income can affect that part of the exemption.
• Time as a non-resident. The exemption is reduced for years you were not a resident of Canada.
• Two properties in the same year. If both spouses designate different homes for the same year, the CRA will deny one.

If you were not a Canadian resident for the whole time you owned the property, the exemption can be reduced or eliminated for those years, and a different formula applies. If you are a non-resident selling Ontario real estate, there are also withholding rules for the buyer. See our article on non-residents selling Ontario property.

If the CRA denies the exemption, you generally have 90 days from the date of the notice of reassessment to file a notice of objection (individuals may have longer in some cases). A lawyer can gather the proof of your occupancy and reasons for moving, make submissions to the CRA's Appeals Division, and appeal to the Tax Court of Canada if needed. See real estate tax disputes and what to do if you receive a CRA reassessment.