Principal Residence – What You Need to Know

When you sell your home, you may realize a capital gain. Whether or not this gain is taxable depends on how the property was used while you owned it.

Tax Implications on Sale

• If the property was used solely as your principal residence for every year you owned it, you do not have to pay tax on the capital gain.

• If at any time it was not used solely as your principal residence, you may have to pay tax on all or part of the capital gain.

• If you sold a property in 2022 that was, at any time, your principal residence, you must report the sale on Schedule 3 of your tax return.

What Qualifies as a Principal Residence?

Your principal residence can be:

• A house

• A cottage

• A condominium

• An apartment (in a building, duplex, triplex, etc.)

• A mobile home, trailer, or houseboat

A property qualifies as your principal residence for a year if all the following conditions are met:

1. It is a housing unit, a leasehold interest, or a co-op share giving you the right to inhabit the unit.

2. You own the property (alone or jointly).

3. You, your spouse/common-law partner (current or former), or your children lived in it at some time during the year.

4. You designate the property as your principal residence.

Land Included in a Principal Residence

• Normally, only up to 0.5 hectares (1.24 acres) of land is considered part of your principal residence.

• You can include more land if you can demonstrate it was necessary to enjoy and use your home (e.g. minimum municipal lot size requirements at purchase time).

Designating a Principal Residence

• You designate your home as your principal residence when you sell or are deemed to have sold it.

• You can designate it for each year it was used as your principal residence, but you may choose not to designate it for certain years.

Limit on Number of Designations

• Before 1982: More than one residence per family could be designated. For example, spouses could each designate a different home.

• 1982 and later: Only one residence per family per year can be designated.

• Family includes:

  • You

  • Your spouse/common-law partner

  • Your children (unless married or 18+)

• Post-2000: Common-law partners are fully included in the same family unit for designation purposes.

📄 For more details, refer to:
Income Tax Folio S1-F3-C2: Principal Residence

Reporting the Sale

• If you sold your principal residence in 2022, you must report the sale and designate it on:

  • Schedule 3 – Capital Gains (or Losses)

• CRA requires this designation to apply the principal residence exemption.

• If you forget to designate, request an amendment to your return. CRA may accept it with a possible penalty.

Change in Use of Property

You may be considered to have sold your property (a deemed disposition) even if you didn’t sell it in these cases:

• You change all or part of your principal residence to a rental property

• You change a rental property to your principal residence

• You stop using a property to earn income

This deemed disposition occurs at the fair market value (FMV). You are considered to have reacquired the property immediately at the same FMV. Any capital gain or loss must be reported.

You do not pay tax on gains for the years it was your principal residence.

Changing Your Principal Residence to a Rental Property

You can make an election under subsection 45(2) of the Income Tax Act not to be deemed to have sold your home when you convert it to a rental. Conditions:

• You don’t claim CCA (Capital Cost Allowance).

• You can still designate it as your principal residence for up to four years, even if you don’t live there.

• You must not designate another home as your principal residence during that period.

You can extend the 4-year limit indefinitely if:

1. You or your spouse/common-law partner relocated for work.

2. You’re not related to the employer.

3. You return to the original home before the end of employment or by the end of the next year.

4. Your original home is 40 km farther from the new job than your temporary residence.

How to Elect

• Send a signed letter with your tax return (or mail it to your tax centre if filing online).

• Include:

  • Property description

  • Statement that you are electing under subsection 45(2)

Changing a Rental Property to a Principal Residence

You may make an election under subsection 45(3) to postpone reporting any capital gain until you sell the property.

Conditions:

• You must not have claimed CCA on the property after 1984 and before the change in use.

Election Rules:

• Make the election by the earlier of:

  • 90 days after CRA requests it

  • Your tax return due date for the year of sale

How to Elect

• Send a signed letter describing the property.

• State you are making an election under subsection 45(3) of the Income Tax Act.

You may designate the property as your principal residence for up to four years before you actually lived in it.

Partial Change in Use (Rental ↔ Principal Residence)

Before March 19, 2019, you could not elect to avoid a deemed disposition on partial changes.

As of March 19, 2019, you can elect (under subsection 45(2) or 45(3)) to avoid the deemed disposition on partial changes.

No Change Deemed if All These Apply:

• The rental or business use is minor.

• You made no structural changes to accommodate rental/business use.

• You did not deduct CCA for the rental/business portion.

If these conditions are not met, you must:

1. Calculate the FMV of the rented/business-used portion at the time of change.

2. Report the capital gain on this portion when sold.

3. Use square metres or room count to split the value between personal and rental/business use.

4. Designate the personal-use portion as a principal residence on Schedule 3 and Form T2091(IND).

📚 Learn More

Visit the CRA’s official guide on principal residence and rental property:
👉 Rental Income – T4036 Guide