Canada guide
The principal residence exemption and the plus one rule
The Canadian principal residence exemption removes the gain multiplied by one plus the number of years the property is designated as your principal residence, divided by the number of years you owned it. Designating 6 of 10 years therefore exempts 7 tenths of the gain, and on a $300,000 gain that leaves $90,000 chargeable, of which 50% is taxable. Only one property per family can be designated for a year.
| Formula | Gain x (1 + years designated) / years owned |
| Designations per family | One property per year |
| Land limit | Half a hectare (1.24 acres) |
| Report on | Schedule 3 and Form T2091(IND) |
| Inclusion rate on any taxable part | 50% |
Why does the formula add one year?
The plus one accounts for the year in which one home is sold and another is bought. Without it, a family that moved in a single year would find that year designated to only one of the two properties, leaving part of the other exposed. The extra year covers the overlap.
The number of designated years plus one can never exceed the number of years owned, so the exemption is capped at the full gain.
Can a cottage be a principal residence?
Yes. A principal residence does not have to be the property you live in most of the time, as long as you, your spouse or common-law partner, or a child ordinarily inhabited it at some point in the year. A cottage can be designated instead of a city home for particular years, which is worth modelling where the cottage grew in value faster.
Because only one property per family unit can be designated for a year, designating the cottage for a year removes that year from the other property.
Do I have to report the sale if there is no tax?
Yes. Since 2016 the sale of a principal residence must be reported on Schedule 3 of the return for the year of sale, with the designation made on Form T2091(IND), even where the exemption removes the entire gain. Failing to report can reduce or deny the exemption and can attract a penalty.
What about the land around the house?
The exemption normally covers the home and up to half a hectare of land. More can qualify where the extra land is necessary for the use and enjoyment of the home, for example because a municipal minimum lot size requires it, but that has to be justified.
Worked example: designated for six of ten years
| Sale price | $700,000 |
| Less adjusted cost base | −$400,000 |
| Capital gain | $300,000 |
| Less exemption, (1 + 6) / 10 of the gain | −$210,000 |
| Remaining capital gain | $90,000 |
| Taxable capital gain at 50% | $45,000 |
| Estimated federal and Ontario tax | $15,253 |
An Ontario resident with $95,000 of other income. Seven of the ten years are covered because of the plus one.
Try your own figures in the Canada capital gains tax on property calculator.
Common questions
How is the principal residence exemption calculated in Canada?
The exempt share of the gain is one plus the number of years designated as your principal residence, divided by the number of years you owned the property.
Why does the formula include an extra year?
It covers the year in which one home is sold and another bought, so a family moving house is not taxed on the overlap between the two properties.
Can I designate two properties in the same year?
No. Only one property per family unit, meaning you, your spouse or common-law partner and any unmarried minor children, can be designated for any given year.
Must I report the sale of my home?
Yes. Since 2016 the sale must be reported on Schedule 3 and designated on Form T2091(IND), even where the exemption covers the whole gain. Not reporting can reduce the exemption and attract a penalty.
This is an estimate for general information only, not tax, legal or financial advice. Tax rules are complex and depend on your circumstances, and figures may not reflect the latest changes. Confirm your position with Canada Revenue Agency (canada.ca) or a qualified tax adviser before acting. The terms of use set out the limits of this estimate and of our liability.
Your figures are worked out in your browser. They are not sent to us or stored.
More guides
Sources
- Calculating and reporting your capital gains and losses (inclusion rate)
- Prime Minister cancels proposed capital gains tax increase, 21 March 2025
- Current year tax rates and income brackets, 2026 (federal and provincial)
- Revenu Québec, income tax rates for 2026
- Principal residence and other real estate (designation, half-hectare limit, flipping rule)
- Income Tax Folio S1-F3-C2, Principal Residence (exemption formula, paragraph 2.20)