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Canada Principal Residence Exemption Guide (PRE)

the Principal Residence Exemption (PRE) in Canada. The PRE fully exempts the capital gain on the sale of the primary home from the tax (the "principal residence" — the home that the taxpayer "ordinarily inhabited" in the year of the ownership). The PRE is the most valuable tax exemption for the Canadian homeowners. The exemption formula (the "1 + the number of years the home is the principal residence" / the "total number of years of the ownership" x the total gain) allows the full exemption if the home is the principal residence for all the years of the ownership. The land limit is 0.5 hectares (1.24 acres) — the land in excess of 0.5 hectares is NOT covered by the PRE (the "excess land" or the "superficies"). The principal residence designation (the Form T2091) is filed with the tax return in the year of the sale. The change of use rules (s. 45(2) and s. 45(3) of the ITA) allow the taxpayer to defer the deemed disposition when the principal residence is converted to the rental property (or the rental property is converted to the principal residence). The 4+7 year rule (s. 45(2)) allows the taxpayer to designate the home as the principal residence for up to 4 years of the rental use (or 7 years for the employment relocation). The trust ownership of the principal residence requires the trust to be a "personal trust" (the "qualifying trust" — the trust that holds the property for the exclusive benefit of the beneficiary). The reporting requirement — the sale of the principal residence must be reported on the tax return (the "pre-2016" years did not require the reporting; from the 2016 tax year onward, the sale must be reported with the Form T2091).

PRE Eligibility

• Ordinarily inhabited: The taxpayer or the family (the spouse, the children, the parents) must "ordinarily inhabit" the home in the year. The home does NOT need to be the full-time residence (the seasonal homes — the cottages, the cabins — can be the principal residence if they are inhabited by the family for at least part of the year).
• One home per year: The family (the taxpayer, the spouse, and the minor children) can designate ONE home per year as the principal residence. The spouse and the minor children cannot designate the separate homes (the "family unit" rule).
• Land limit: The PRE covers the home and up to 0.5 hectares (1.24 acres) of the surrounding land. The excess land (the "superficies") is NOT covered — the gain on the excess land is subject to the capital gains tax. The CRA considers the "necessary for the use and the enjoyment" of the home.
• Farming property: The farm property can qualify as the principal residence if the farmer "ordinarily inhabits" the farm home. The farm land (the "farmland") beyond 0.5 hectares may be exempt if the farm is the "family farm" and the farming income test is met.

Change of Use Rules

• s. 45(2) election (rental conversion): When the principal residence is converted to the rental property, the taxpayer is deemed to have sold the property at the fair market value (the "change of use" deemed disposition). The taxpayer can elect under s. 45(2) to defer the deemed disposition for up to 4 years (the "4-year rule"). The election allows the taxpayer to designate the home as the principal residence for up to 4 years of the rental use (the "deemed continuation of the principal residence status").
• s. 45(2) — 7-year rule: The 4-year period is extended to 7 years if the taxpayer is employed by the employer who requires the relocation (the "employment relocation" — the taxpayer moves to the new job location and rents the former home). The taxpayer must file the Form T2091 and the s. 45(2) election.
• s. 45(3) election (principal residence conversion): When the rental property is converted to the principal residence, the taxpayer is deemed to have disposed of the property at the fair market value (the "deemed disposition" at the conversion date). The taxpayer can elect under s. 45(3) to defer the deemed disposition — the taxpayer can designate the "principal residence year" for the future sale (the "deemed acquisition at the cost base").

PRE Designation & Reporting

• Form T2091: The "Designation of a Property as a Principal Residence by an Individual" — the form is filed with the tax return in the year of the sale. The form includes the description of the property, the dates of the ownership, and the designation of the principal residence years.
• Reporting requirement (2016+): The sale of the principal residence must be reported on the tax return (the Schedule 3) — even if the gain is fully exempt. The penalty for the non-reporting is $100 per year (up to $8,000). The CRA can deny the PRE if the Form T2091 is not filed.
• Multi-home owners: The taxpayer who owns multiple properties (the home and the cottage) can designate ONLY ONE property as the principal residence each year. The taxpayer should designate the property with the highest gain per year (the "optimal designation" — the "1+" formula allows the designation of the highest-gain property in the year of the sale).

For the capital gains inclusion rates and the taxable capital gains, see our Capital Gains Tax Guide →. For the Underused Housing Tax (UHT) and the vacant home taxes, see our Vacant Home Tax Guide →.