Canada: Home Sweet Home

Selling your home? Don't get thrown by the principal residence exemption
Last Updated: October 7 2014
Article by Samantha Prasad

Selling your home? Don't get thrown by the principal residence exemption.

Selling your home? If so, you are likely caught up in the usual headaches that come with such a transaction: getting the right selling price, boxing up your possessions and finding a new home to live in. And as a result, you may not be focused on the tax implications that are as much a part of moving as cardboard boxes and packing tape.

We often reassure ourselves that we're covered by the principal residence exemption, which prevents us from having to pay capital gains tax on our homes.

But, the principal residence exemption is not as simple as we like to think. Here`s a summary of some of the more important rules to keep in mind if you want to take advantage of the exemption:

  • The home must be ordinarily occupied for personal use by you, your spouse or former spouse, or a child at some time during the year.
  • To claim the principal residence exemption on a large lot (over half a hectare – about 1 acre), you must be in a position to establish that the land over half a hectare is necessary for the "use and enjoyment" of your home.
  • Restrictions will also apply if part or all of your home is rented out or not used by a family member, or if you have not been resident in Canada throughout the period of ownership.
  • As a general rule, a family can claim the principal residence exemption on only one home at a time. So a second home (such as a cottage) is more of a problem: to stop you from trying to claim a separate exemption for another home by putting it in the name of a child, children are restricted from claiming the exemption unless they have reached eighteen in the year or are married.

How it works

Most people think of the principal residence exemption as a black and white matter: either you qualify to sell tax free, or you don't. Actually, this is not the case.

When you sell your home, you must calculate the gain on your residence just like any other capital gain. Then the principal residence exemption itself reduces your gain.

Moreover, eligibility for the exemption is on a year-by-year basis, which might come as a surprise to you. The more years you qualify relative to your total period of ownership, the more your gain gets reduced. To be more precise, the following is the basic formula that normally applies:

As you can see, to get the tax reduction, you must designate the home as principal residence on a year-by-year basis. (If your gain is completely covered by the principal residence exemption, it is not necessary to file the designation form with your tax return.)

The principal residence exemption has also been the focus of various caselaw.

In a 2013 case (Sangha), the principal residence exemption was denied where the house was built with intent to sell it at a profit. The taxpayers lived in the house for a few weeks in an attempt to establish it as a principal residence; however, the house was never furnished and was for sale the entire time.

Another case decided by the Federal Court of Appeal (Cassidy) focused on whether a taxpayer was entitled to the principal residence exemption for a property that was more than half a hectare.

As noted above, in order for any excess land to qualify, it must be necessary for the use and enjoyment of the home. In this case, the home sat on 2.43 hectares of land and was owned by the taxpayer from 1994 to its sale in November 2003.

The taxpayer argued that since he was legally unable to subdivide the land (up until May 2003), the entire 2.43 hectares was necessary for his use and enjoyment since he could not put a home on a smaller piece of land.

In the initial judgment, the Tax Court of Canada agreed with the CRA in denying the principal residence exemption on the basis that the half hectare rule applied only on the date of sale. And since the sale was in November 2003, the restriction on the subdivision was no longer in place.

However, the Federal Court of Appeal rejected that argument and sided with the taxpayer in holding that the principal residence exemption determination is made each year and not just at the time of sale. Therefore the principal residence exemption applied to the entire 2.43 hectares.

Another trap that you may find yourself stumbling into relates to the situation where part or all of the residence becomes non-personal use.

Specifically, where part of the property is rented out, the value of the residence itself must be pro-rated as between personal and non-personal use, and only the personal portion will qualify for the personal residence exemption. But on what basis? The appreciation on a residence is composed of land and building components. In many areas of Canada, most of a gain is attributable to land values rather than building values, especially since buildings tend to depreciate as they get older.

The standard advice is to pro-rate the land gain in the same ratio as building use. But in the right circumstances, you might be able to make an argument that a greater proportion of land is eligible for the personal residence exemption.

Change of use

Easy enough right? Well, here is where the rules get a bit trickier. If the property itself changes from being a home for you or your family to being a rental property (i.e. from personal use to income-producing use), then you will be deemed to have disposed of the property (both land and building) at fair market value and reacquired it immediately thereafter at the same amount.

Any gain otherwise determined on this deemed disposition may be eliminated or reduced by the principal residence exemption.

You are, however, entitled to elect that no change in use is considered to have taken place if you make an election to treat the property as a principal residence. This election can be made by means of a letter to that effect signed by you and filed with the income tax return for the year in which the change in use occurred.

Be aware, however, that if capital cost allowance (CCA) is claimed on the home, the election is considered to be rescinded on the first day of the year in which that claim is made.

If you make this election, the property can qualify as your principal residence for up to four taxation years during which the election remains in force, even if the residence is not ordinarily inhabited during those years by you, your spouse or a child.

However, you must remain a Canadian resident during these years for the full benefit of the principal residence exemption to apply.

This election is advantageous if you move back into the residence since any change from income-producing back to personal use will also result in a second deemed disposition.

If you had made the election that no change in use was to apply to the residence when it first changed from personal use to income-producing use (so that it remained a principal residence), when you move back into the residence at a later date there will be no change of use since the property will have always been deemed to be personal use.

And you can designate four of those years you were away as part of the principal residence exemption to shelter a portion of the gain.

There are ways to get around this four year limitation in certain situations. If you are renting your residence due to the fact that you, or your spouse, are required to move by your employer, none of the years you are away from the residence and renting it will be included in the 4 year limitation period ordinarily imposed by the election (i.e., it can be extended indefinitely). This applies only if the following conditions are met:

(1) you do not ordinarily inhabit the home during the period of the election because your (or your spouse's) employment has been relocated;

(2) the employer is not related to you or your spouse;

(3) the home is at least 40 kilometers farther from the new place of employment than your old place of employment; and

(4) either:

(a) you resume living in the home during the term of your (or your spouse's) employment with that employer;

(b) if your (or your spouse's) employment with that employer is terminated and you resume living in the home before the end of the next taxation year; or

(c) if you (or your spouse) pass away during the term of your (or your spouse's) employment with that employer.

Conversely, if a property which you have being using to earn income becomes your principal residence, there will be a deemed disposition based on the change of use rules.

Again, however, you can defer the recognition of any gain or loss on the deemed disposition arising from the change in use by making the necessary election which operates in the same way as the one discussed above.

Note that this election does not defer the recapture of CCA on the change in use and in fact the election will not be allowed if any CCA has been claimed on the property after 1984 and before the property becomes the principal residence of the taxpayer.

And, to make the story complete, there will also be a deemed disposition if you partially convert your principal residence to an income-producing use, and the partial change is substantial and of a more permanent nature, i.e., where there is a structural change.

The CRA cites certain examples of this occurrence as including the conversion of the front half of a house into a store, a portion of a house into a self-contained apartment (i.e. a duplex, or triplex) or alterations to a house to accommodate separate business premises.

And you would think that if there is going to be a deemed disposition, that the CRA would also give you a break and allow you to make an election as in the case where there's a total change in use. Right? Wrong.

There is no election avail- able where there is a partial change in use. Instead, the CRA has administratively stated that they will not apply the deemed disposition rule (and hence, the property will retain its nature as a principal residence) if all of the following conditions are met:

  • the income-producing use is ancillary to the main use of the property as a residence;
  • there is no structural change to the property; and
  • no CCA is claimed on the property.

Examples of when these conditions can be met include where you carry on a business of caring for children in your home, rent one or more rooms in the home, or you have an office or other work space in the home which is used in connection with your business or employment.

Although you may claim expenses pertaining to that portion of the property used for income-producing purposes, the CRA will jump in to apply the deemed disposition rule if you claim CCA on that portion of the residence.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Samantha Prasad
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.