Tax glossary

Principal residence exemption

Short answer

The principal residence exemption shelters some or all of the capital gain on the sale of a home that you or your family ordinarily inhabited during the years you owned it.

Last reviewed: August 20, 2026

Key facts

Category	Personal tax
Reported on	T1 Schedule 3 and Form T2091, even when the gain is fully exempt
Designation	One property per family unit per year
Requires	Ordinary inhabitation by the taxpayer, spouse or child in the year designated
Penalty	Applies for failing to report the disposition
Authority	Canada Revenue Agency; Revenu Québec

What it means in practice

A family unit can designate only one principal residence per year, which matters when a couple owns both a house and a cottage. The sale must be reported on your return even when the gain is fully exempt. Failing to report can cost the exemption entirely or attract a penalty per month of delay, and this is a common and expensive oversight. Renting out part of the home, or a change in use between personal and rental, can partially disqualify the exemption and trigger a deemed disposition at the point the use changed.

Reporting is mandatory even when no tax is owed

Since 2016 the sale of a principal residence must be reported, and the designation made, even where the exemption covers the entire gain. Failing to report can cost the exemption or attract a penalty, and the CRA can reassess the year indefinitely where the disposition was not reported at all. The exemption is calculated by a formula based on the number of years designated relative to years owned, with one additional year built in. Because only one property per family unit can be designated for a given year, a family owning both a home and a cottage has a genuine allocation decision to make on the first sale. A change of use is the other trigger. Moving out and renting the property is a deemed disposition at fair market value; an election can defer the recognition, but it has conditions and cannot be filed retroactively without relief.

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FAQ

Can I claim the exemption on my cottage?

Yes, if it was ordinarily inhabited in the years designated — occasional seasonal use generally qualifies. But designating a year to the cottage removes it from the city home for the same year, so the choice should be modelled across both properties rather than made at the first sale.

I rented out part of my home. Does that affect the exemption?

It can. Renting a portion while continuing to live in the property is usually acceptable where the rental use is ancillary, no structural change was made and no CCA was claimed. Claiming CCA on the rented portion is what most often converts part of the property to income-earning use.

Sources

Need this applied to your situation?

A definition only gets you so far. Talk to a Montréal CPA about what this means for your return — in English or French.

Contact (438) 375-3649