Blog > Selling Your Home in Ontario: When the Principal Residence Exemption Doesn't Cover the Whole Gain
Selling Your Home in Ontario: When the Principal Residence Exemption Doesn't Cover the Whole Gain
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If the home you are selling was your family's principal residence for every year you owned it, the principal residence exemption generally means no tax on the gain. You still have to report the sale and designate the property on your tax return for the year you sell.
The exemption stops covering the whole gain in a few common situations: you owned another home, like a cottage, that you would also want to designate for some of the same years; part of the house was rented out in a way that changed its use; you lived somewhere else and rented the house for part of the time; the lot is bigger than half a hectare; or you owned it for less than 365 days.
If any of those apply to you, talk to an accountant before you accept an offer, not after closing.
What counts as a principal residence
The Canada Revenue Agency's test is broader than most people expect. A property can qualify for a given year if it is a housing unit you own alone or with someone else, and you, your spouse or common-law partner, or one of your children lived in it at some time during that year. You then designate it as your principal residence for that year.
"Lived in it" does not mean all year. CRA's technical guidance says even a short period in the year can be enough for a home to count as ordinarily inhabited, which is why a seasonal cottage can qualify. The catch is the next rule.
- One home per family per year. For 1982 and later years, a family unit can designate only one property as its principal residence for each year. The family unit generally means you, your spouse or common-law partner, and your unmarried children under 18.
- Land is usually capped at half a hectare. That is about 1.24 acres, including the land under the house. More can qualify only if you can show the extra land was needed for the use and enjoyment of the home.
- The exemption is calculated by years. The exempt share of the gain is based on the number of years the home is designated, plus one, over the number of years you owned it. That extra year is there so a family that buys one home and sells another in the same year can treat both as a principal residence for that year.
You still have to report the sale
This is the part people miss. Since the 2016 tax year, CRA only allows the exemption if you report the sale and the designation. For a sale in 2025 or later, that means Schedule 3 (Capital Gains or Losses) and Form T2091(IND), the designation form. When the home qualifies for the full exemption, CRA says you report the year you acquired it, the proceeds of disposition and a description of the property.
If you forget, CRA can accept a late designation in certain circumstances, but a penalty may apply. CRA's stated penalty is the lesser of $8,000 or $100 for each complete month from the original due date to the date your request is made. Filing it correctly the first time costs nothing.
Where the exemption may not cover the whole gain
| Situation | Why it matters | What to look at |
|---|---|---|
| You also own a cottage or second home | Only one property per family can be designated for each year | Which property has the larger gain per year owned, and whether you plan to sell the other one later |
| Part of the home was rented out | The whole home keeps its status only if the rental use was ancillary, there was no structural change and no capital cost allowance was claimed | Whether a separate unit was built, and whether depreciation was ever claimed on your return |
| You moved out and rented the whole house | A change in use is treated as a sale at fair market value unless you make an election | Whether a subsection 45(2) election was filed, and how many years have passed |
| The lot is over half a hectare | Extra land usually is not covered unless it was needed for the use and enjoyment of the home | Lot size, and whether the extra land was actually needed to use and enjoy the home |
| You owned it less than 365 days | The gain is deemed business income, not a capital gain, unless a life-event exception applies | Your exact purchase and sale dates, and the reason for selling |
The basement apartment question
Renting part of your home does not automatically cost you the exemption. CRA says the whole property keeps its principal residence status when the income-producing use is ancillary to the main use as your home, there is no structural change to the property, and you have not claimed capital cost allowance on it.
A self-contained basement apartment with its own entrance and kitchen is a different conversation from renting a spare bedroom to a student. Where the conditions are not met, CRA's approach is to split the property between the part you lived in and the rented part, using square metres or number of rooms as long as the split is reasonable. The gain on the rented share is not covered. Since March 19, 2019, an election may also be available for a partial change in use, which is worth raising with your accountant before the sale. If you are on the buying side of that same house, I covered the legal-unit questions in buying a house with a basement apartment in Ontario.
Moving out of Ottawa and keeping the old house
A common Eastern Ontario move is buying in Brockville, Kemptville or a smaller town along the corridor and renting out the Ottawa house for a while instead of selling it right away. When you change a home from personal use to rental, CRA treats that as a sale at fair market value on the day the use changed, followed by an immediate buy-back at the same value.
A subsection 45(2) election lets you skip reporting that deemed sale and keep designating the old house as your principal residence for up to four years while it is rented, as long as you do not claim capital cost allowance on it. That period can be longer in some employer-relocation situations. Two things to keep in mind: your family can still only designate one home per year, so years used on the Ottawa house cannot also go to the new one, and the four years run whether or not you have decided to sell. The reverse, moving back into a former rental, has its own election under subsection 45(3).
If you are still deciding whether to sell first or hold on, the Ottawa-to-Brockville equity piece and sell first or buy first cover the timing side. The tax side is the piece to get advice on early.
Selling within a year of buying is treated differently.
Under the residential property flipping rule, a gain on a Canadian housing unit you owned for less than 365 consecutive days is deemed to be business income, and the principal residence exemption does not shelter it. There are exceptions for specific life events, including a death or a related person joining the household, a relationship breakdown, a threat to personal safety, serious illness or disability, an eligible relocation for work or school, involuntary job loss, insolvency, and destruction or expropriation of the home. If you are thinking about a quick resale, check how the rule applies before you list.
What to gather before you list
- Your purchase date and price, and the cost of major improvements over the years.
- Any other property your family owned during the same years, including a cottage, and whether it was ever designated.
- Any period the house, or part of it, was rented, and whether capital cost allowance was ever claimed.
- Any structural work done to create a rental unit, and any elections already filed.
- The lot size, if it is a larger rural property.
None of this is a closing cost, but it can change what you actually keep from the sale. I walked through the costs that do come off the proceeds in what it costs to sell a house in Ontario.
Thinking about selling a home in Ottawa, Brockville or along the corridor, and some of this sounds like your situation?
I can help you plan the timing and the numbers on the real estate side, and make sure the right questions get to your accountant before you list. Get in touch. No pressure either way.
Sources: Canada Revenue Agency, Principal residence; Canada Revenue Agency, Reporting the sale of your principal residence; Income Tax Folio S1-F3-C2, Principal Residence.
This is general information about federal tax rules as CRA described them in September 2026, not tax or legal advice. An accountant should confirm how the rules apply to your sale.