Canada sets no minimum number of years you must live in a home to claim the principal residence exemption. The home must be ordinarily inhabited and the sale reported to the Canada Revenue Agency (CRA). A home sold within 365 days of purchase is usually fully taxed as business income unless a listed life event applies.
Capital gains tax on real estate in Canada is often smaller than sellers fear.
Mandeep Dhesi of RE/MAX EXCELLENCE REAL ESTATE, BROKERAGE wrote this guide for owners who want to know which rules apply before they list. Most family homes are exempt. Where sellers get caught is paperwork, a quick resale, or a home that was rented for a while.
- A home that was your principal residence every year you owned it is usually exempt.
- The exemption is only allowed when the sale is reported on your tax return.
- Advice written in 2024 or early 2025 may describe a tax increase that never happened.
Data as of: rules checked 25 Oct 2026 against CRA and Department of Finance Canada pages..
What Changed: The Two-Thirds Rate Was Cancelled
Budget 2024 proposed raising the share of a capital gain that is taxed from one-half to two-thirds for gains above a threshold. The change was first deferred, then cancelled.
On 21 March 2025 the Prime Minister cancelled the proposed capital gains tax increase. The inclusion rate, the share of a gain added to taxable income, stays at 50%, one-half of the gain.
How Capital Gains Tax Works on Property
A capital gain is the selling price minus the adjusted cost base (purchase price plus eligible costs such as legal fees and major improvements) and selling costs such as commission.
Only part of the gain is taxed. That share, set by the inclusion rate, is added to your income for the year and taxed at your marginal rate. There is no separate “capital gains tax” bill.
Whether a gain is taxed at all depends mainly on one question: was the property your principal residence?
The Principal Residence Exemption
The principal residence exemption (PRE) can reduce or remove the gain on a home you, your spouse or common-law partner, or your children ordinarily lived in. CRA explains the rules on its principal residence page.
A family unit can designate only one home as its principal residence for each year. A cottage and a city house cannot both be designated for the same year.
How Long Do You Have to Live in a House?
There is no fixed minimum stay for the PRE. The test is whether the home was ordinarily inhabited in the year, which CRA says can be met even by a short stay, such as a seasonal residence.
The real time limit comes from a different rule. If you sell within a year of acquiring the home, the flipping rule usually applies and the PRE is not available (see below).
The Exemption Formula and the Plus-One Rule
The exempt portion of the gain is worked out per year designated:
Exempt gain = gain × (1 + years designated) ÷ years owned
Hypothetical example (not real figures): a home owned for 10 years and designated for 9 of them gives (1 + 9) ÷ 10, so the full gain is exempt. Designated for 5 of 10 years, 60% is exempt.
The “plus 1” exists because families often own two homes in the year they sell one and buy another. It lets both be treated as eligible for that year, as long as you were resident in Canada in the year you bought the new home.
Reporting the Sale: Schedule 3 and T2091
Since the 2016 tax year, CRA allows the PRE only when the sale and the designation are reported. CRA set this out when it announced the reporting requirement.
According to CRA, a sale of a property that was at any time your principal residence is reported on Schedule 3, Capital Gains or Losses, and on Form T2091(IND), Designation of a Property as a Principal Residence by an Individual.
Your accountant or tax software completes these with your return for the year of sale.
Missing the designation can cost you the exemption. CRA may accept a late designation in some cases, and a penalty can apply.
The Residential Property Flipping Rule
For homes sold on or after 1 January 2023, a profit on a housing unit owned for less than a full year of consecutive days is treated as business income. It is fully taxable, and the PRE cannot be claimed.
The rule comes from the Budget 2022 tax measures.
CRA explains it in Income Tax Folio S1-F3-C2.
The rule also covers assignment sales, where you sell your right to buy a home before closing. The 2022 Fall Economic Statement confirmed that the clock restarts when you take ownership of the finished home.
A sale held longer than the threshold is not automatically a capital gain either. CRA can still treat frequent buying and selling as a business.
Life-Event Exceptions
The flipping rule does not apply when the sale is reasonably linked to a life event. The Finance Canada explanatory notes list:
- death of the owner or a related person
- a new member joining the household
- breakdown of a marriage or common-law relationship
- a threat to personal safety
- serious illness or disability
- an eligible relocation for work
- involuntary end of employment
- insolvency
- destruction or expropriation of the home
An exception removes the automatic business-income treatment. It does not by itself guarantee the gain is exempt; the normal rules still apply.
Rentals and Change of Use
Turning your home into a rental, or a rental into your home, is a change of use. CRA treats it as if you sold and bought back the property at fair market value on that date, which can create a gain with no cash received.
Elections under section 45(2) or 45(3) of the Income Tax Act can defer that deemed sale in many cases. The conditions are in Folio S1-F3-C2, and a common one is that you claim no capital cost allowance (CCA) on the property.
For a property that was a rental, the gain is taxed at the inclusion rate.
Any CCA claimed in earlier years can be recaptured, meaning it is added back to income and fully taxed. A basement suite or home office can create a partial change of use, reported on Schedule 3 and T2091.
Selling as a Non-Resident (Section 116)
Owners who are not resident in Canada must notify CRA about the sale under section 116 and request a clearance certificate, usually with Form T2062. CRA’s guide T4058 covers non-residents and income tax.
If the price ends up above the certificate limit, CRA’s T4058 guide says the buyer can withhold 25% (50% on certain types of property) of the cost minus that limit (CRA T4058, checked 25 Oct 2026).
Non-resident sellers should start the clearance process well before closing.
Do not confuse this with Ontario’s Non-Resident Speculation Tax. Buyers pay that one.
Underused Housing Tax: Ended From 2025
The Budget 2025 tax measures announced the end of the federal Underused Housing Tax (UHT) from the 2025 calendar year.
Bill C-15, the Budget 2025 Implementation Act, No. 1, received Royal Assent on 26 March 2026. It ends the UHT for 2025 and later calendar years, so no UHT return is due for those years, and, as CRA Excise and GST/HST News No. 121 notes, filing obligations for 2022 to 2024 remain, and an owner who missed an earlier filing should speak to an accountant.
Deferring Tax
Canada has no like-kind exchange that rolls a gain into a new property. One tool is the capital gains reserve, used when part of the price is paid in later years.
CRA’s guide T4037 says most reserves can be claimed for up to four years, so the gain is reported across five tax years including the year of sale.
Deferral strategies for investors will be covered in a separate guide.
When to See an Accountant
Sellers who want a value estimate first can request a home evaluation. General rules cover a simple sale of a home you lived in the whole time. Get advice from a CPA or tax lawyer before listing if any of these apply:
- the home was rented, fully or in part, at any point
- you changed its use, or ran a business or home office from it
- you own more than one property, such as a cottage
- you are selling within a year of buying, or sold an assignment
- you are, or will be, a non-resident of Canada
- the property is held in an estate, a trust or a corporation
- you missed reporting an earlier sale or a UHT filing
Frequently Asked Questions
How long do you have to live in a house to avoid capital gains in Canada?
Do I pay capital gains tax when I sell my house in Ontario?
Do I have to report the sale of my home to CRA?
Is the capital gains inclusion rate one-half or two-thirds in 2026?
Can a couple have two principal residences?
What happens if I rent out my house and then sell it?
What must a non-resident do when selling property in Canada?
Conclusion
Most sellers of a long-time family home owe no capital gains tax, as long as the sale is reported correctly. The harder cases are rentals, quick resales, second properties and sellers living abroad, and those are worth an accountant’s review before the home is listed.
We can help with the market side of a sale, including an estimate of what the home may sell for and when to list. To talk through timing a sale, reach Mandeep Dhesi and the Aura Key Realty team: call 647-905-0370 or email office@aurakeyrealty.ca.
Disclaimer: This article is for informational purposes only and does not constitute legal, tax, or financial advice. Laws and regulations may change over time. Always consult a qualified real estate lawyer or other appropriate professional before making any decisions.
