Principal residence exemption, rental properties, and what you owe the CRA
Not all Canadian home sales are tax-free. The principal residence exemption is powerful — but it has limits. Rental property sales are taxed differently. Here's what every seller needs to understand before they close.
If a property was your principal residence for every year you owned it, the entire capital gain is tax-exempt. You may only designate one property per family unit as a principal residence per year. The exemption does not apply automatically — you must file Schedule 3 and Form T2091 with your tax return in the year of sale. The exemption generally still applies even if you rented out a portion of the home (a basement suite), provided your primary purpose was personal use and you did not make a structural change to create a separate unit.
You rented the entire property for a period during ownership. You purchased with the primary intent to resell (flipping). You own multiple properties and cannot designate this one for the full period. You are a non-resident of Canada. British Columbia introduced a Home Flipping Tax in January 2025 for BC residential properties held less than 730 days — this is separate from and in addition to the federal capital gains rules. Check both rules if selling a BC property held short-term.
Your capital gain = sale price minus adjusted cost base (ACB) minus selling costs. ACB = original purchase price plus eligible capital improvements (new roof, addition, kitchen renovation — documented with receipts). 50% of capital gains are included in taxable income for individuals (the inclusion rate). For gains over $250,000, the 2024 federal Budget proposed increasing the inclusion rate to 2/3 — consult an accountant as this was still evolving legislatively. Your effective tax on the gain depends on your marginal tax bracket.
Keep every receipt for capital improvements — they increase your ACB and reduce taxable gain. Renovations that qualify: new kitchen, bathroom addition, deck, landscaping, new roof, added floor. Repairs do not qualify — only capital improvements. Consult a tax accountant before selling any property that was ever rented or used for income purposes. Non-residents selling Canadian property must obtain a Section 116 clearance certificate and withhold 25% of gross proceeds — failure results in the buyer becoming liable.
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Read All ReviewsThese guides are written for Canadian buyers, sellers, renters, and landlords and are kept current for 2026. They are for informational purposes only — not legal, tax, or financial advice. Rules vary by province; confirm details with your lawyer, accountant, or licensed real estate professional before making decisions.