How Does the Principal Residence Exemption Work in Ontario?

Short answer: the principal residence exemption can reduce or eliminate the capital gain when you sell your home in Toronto, Hamilton or anywhere in Ontario. It generally applies for each year you designate the property as your principal residence, and a family can usually designate only one property per year, so value matters when you own more than one.

What Is the Principal Residence Exemption?

When you sell a property for more than you paid, the profit is a capital gain, and part of it is normally taxable. The principal residence exemption is a rule in the Income Tax Act that shelters some or all of that gain for the years the property was your principal residence.

The exemption is worked out with a formula. Roughly, the sheltered share of the gain equals one plus the number of years you designate, divided by the number of years you owned the home. The "plus one" generally helps people who buy one home and sell another in the same year.

What Counts as a Principal Residence?

A house, condo, townhouse, cottage or even a mobile home can qualify. Generally, you (or your spouse, common-law partner or child) must have ordinarily inhabited it during the year. A property you never lived in and only rented out usually won't qualify.

The land around the home is generally included up to half a hectare, which covers almost every Toronto and Hamilton lot.

Can I Have Two Principal Residences?

Generally, no. A family unit, meaning you, your spouse or common-law partner and your unmarried children under 18, can designate only one property per year. If you own a city home and a cottage, you can't shelter both for the same years.

That leads to a real decision when you sell one of them: which property should get the designation for which years? Often it makes sense to designate the property with the larger gain per year, but the right answer depends on your plans for the other property. This is a decision to make with your accountant.

What about homes that were rented out?

If a home was rented for part of the time, a change of use may have happened. Our guide on renting out your home explains how that works.

Do I Have to Report the Sale of My Home?

Yes. Even when the exemption covers the entire gain, CRA generally requires you to report the sale and the designation on your tax return for the year you sell. Missing it can cause problems, so let your accountant know about any sale.

Also note that homes sold after a short period of ownership may be treated differently under newer rules for property flipping. If you're selling a home you bought recently, ask your accountant before you list.

Why Value Matters for the Principal Residence Exemption

Choosing which property to designate depends on how much each one gained, and that depends on supported values at key dates:

• The value when a property changed use, for example when it became a rental
• The value at the date of death, if the property is in an estate
• The current value of a property you're keeping, to compare gains per year

A certified capital gains appraisal documents the fair market value on the date you need. It is prepared by a designated appraiser to the Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP) and explains how the value was reached, which is much easier to support than an online estimate. If the key date is in the past, a retrospective appraisal can value the home as of that date.

How Much Does an Appraisal Cost?

At Best Home Value, an appraisal of today's value starts at $370 for a condo or townhouse, $475 for a detached or semi-detached house and $700 for a 2–4 unit property in the Greater Toronto and Hamilton Area. Past-date appraisals start at $470, $575 and $800. Your exact fee is confirmed in writing within one business day, before anything is booked. See our full fee table.

How long does it take?

Most reports are delivered as a signed PDF within 2–3 business days of the inspection.

Related Articles

• Renting out your home? What happens with capital gains
• Can I get an appraisal for a past date for CRA?
• Selling an inherited home: what about capital gains?

This article is general information, not tax, legal or financial advice. Please speak with your accountant, lawyer or lender about your situation.