Top questions about principal residence exemption

What is the principal residence exemption?

The principal residence exemption generally allows you to sell your home, i.e., your principal residence, without paying tax on any increase in the home's value. In most situations, when these assets increase in value, the resulting capital gain is partially taxable. The principal residence exemption allows you to shelter the capital gain on your home.

What is a capital gain and how much is the capital gain tax?

A capital gain is the resulting profit from the sale of an asset for more than you purchased it. There isn't really a separate capital gain tax, nor a capital gain tax rate. Rather, when property is sold resulting in a capital gain, a portion of that gain is included in your income. This is called the capital gain inclusion rate. When a portion of a capital gain is included in your income, it is taxed accordingly at your marginal tax rate.

What were the changes to the principal residence exemption?

Until recently, the capital gain inclusion rate was 50%. This does not mean that the gain is taxed at a rate of 50%. Rather, it means that 50% of the gain is included in your income and taxed accordingly. As of June 25, 2024, the capital gain inclusion rate has changed, and is now 50% of the first $250,000 in capital gains you earn during the year, plus two-thirds, or 66.67%, of any further capital gains.

For capital gains above $250,000, this change results in a higher tax bill. With many homes across the country having increased significantly in value in recent years, the principal residence exemption is now even more valuable.

What is a principal residence?

To designate a property as your principal residence, you must own it, either alone or with someone else. You and/or your spouse or common-law partner must live in it for at least some of the year. It may be a house, apartment or unit, cottage, mobile home, trailer, houseboat, leasehold interest in a housing unit, or share of the capital stock of a housing corporation.

How do I designate my home as a principal residence?

There’s no need to designate your home as a principal residence until you sell it. At that point, you must file both Schedule 3, Capital Gains (or Losses) and Form T2091IND, Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust). If you don’t do this reporting, you cannot apply the principal residence exemption and you’ll have to pay tax on the capital gain that results from the sale.

If you didn’t fill out these forms in the year you sold your home, you can request an amendment to that year’s income tax return. The Canada Revenue Agency (CRA) may allow a late designation, although it is not guaranteed, and a penalty may apply.

How we can help

Whenever you’re making decisions that affect your financial life, including how to apply the principal residence exemption, it’s a good idea to ask an advisor for guidance and a tax professional.

Edward Jones, its employees and financial advisors cannot provide tax or legal advice. You should consult your lawyer or qualified tax advisor regarding your situation or any specific questions you may have. This content is subject to change and should not be depended upon for other than broadly informational purposes. Specific questions should be referred to a qualified legal or tax professional.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

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