Capital gains tax when selling a house in Ontario: the principal residence exemption explained

There is no separate capital gains tax

People search for an Ontario capital gains tax, but the CRA's capital gains guide (T4037) says Canada has no separate capital gains tax. Instead, a fraction of the gain, called the inclusion rate, is added to your income as a taxable capital gain and taxed along with everything else. You report it on Schedule 3 of your return.

You have a gain when you sell, or are treated as having sold, a capital property for more than its adjusted cost base. The rest of this page is about the one big exception for homeowners, and the situations where it does not apply. How the taxable portion is taxed in Ontario depends on your total income that year, which is a question for your accountant.

The principal residence exemption

The same guide says that if you sell your home you usually do not have to pay tax on the gain, as long as the conditions are met and the home is designated properly. The CRA's principal residence page sets out the rules.

Two features matter for a long-time homeowner. First, one property per family unit can be designated for each year from 1993 onward, and a family unit means you, your spouse or common-law partner and your dependent children. Second, the CRA's guide describes a principal residence as one you designate for all the years you owned it, or all except one. Your accountant can say whether that fits your history.

Designation and reporting: Form T2091

Since 2016 the CRA allows the exemption only if you report the sale and the designation on your return, using Schedule 3 and Form T2091(IND), even when the whole gain is exempt. This is the avoidable mistake. Put it on your list the day the sale closes, and tell your accountant before the return is prepared, so the designation is not left to the last week of filing season.

• Keep the closing statement and the agreement of purchase and sale
• Keep records of what you paid for the home and the dates you owned it
• Tell your accountant about the sale before you file
• Report the sale on Schedule 3 and complete Form T2091(IND)
• If the owner has died, the legal representative uses Form T1255 instead

That last point matters for families. The guide to selling a parent's house after death covers what changes when the owner is no longer living.

The plus-one rule, half a hectare and change in use

The plus-one rule

If you sell one home and buy another in the same year, both can qualify for that year even though only one is designated. This often applies to a downsizer, who sells the family home and buys a smaller one. The CRA page explains the rule, and your accountant can apply it to your dates.

Half a hectare of land

Usually only half a hectare (1.24 acres) counts as part of your principal residence. More can qualify if you can show it was necessary, for example because of a municipal minimum lot size. If you are selling a rural property in Woolwich, Wilmot or Wellesley, ask your accountant early whether the lot is within the limit. The Woolwich and Wilmot pages cover local context.

Change in use

If you start renting out a home that was your residence, the CRA treats it as a sale at fair market value, and an election can defer that, provided you do not claim capital cost allowance and meet other conditions. The details are technical, so speak to an accountant before you rent out a home you plan to sell.

A cottage, a rental or a second property

Only one property per family unit can be designated for a given year. If you own a cottage and a home, the gain on one of them may be taxable, and your accountant can work out which designation makes sense for which years. A gain that is not exempt is taxed at the inclusion rate in the CRA's guide.

The 365-day flipping rule and its exceptions

For sales from January 1, 2023, a housing unit held for fewer than 365 consecutive days has its gain treated as business income, not a capital gain, and the principal residence exemption is not available. The CRA lists exceptions for certain life events.

• Death
• A household change
• A relationship breakdown, with a separation of at least 90 days
• A threat to personal safety
• A serious illness or disability
• An eligible relocation, at least 40 km closer to a new workplace or school
• Involuntary job loss or insolvency
• Destruction or expropriation of the home

This is unlikely to affect someone selling a home they have owned for years. It can matter if you bought a smaller home and then need to sell it quickly. If that happens, ask your accountant whether one of the exceptions fits.

The 50 percent inclusion rate, the cancelled increase and OAS

The CRA's guide for 2025 says the inclusion rate is one-half, so 50 percent of a capital gain is a taxable capital gain. The government proposed raising the rate on larger gains, then cancelled the proposed increase on March 21, 2025. Check the CRA's current guide for the year you sell. Rates can change.

An illustration of the inclusion rate

This is arithmetic, not a forecast. At a 50 percent inclusion rate, a capital gain of $100,000 on a property that is not exempt produces a taxable capital gain of $50,000. That $50,000 is added to your income for the year, and your tax depends on your total income and your province. Your accountant can run the figure for your own year.

How a taxable gain interacts with Old Age Security

The CRA's OAS recovery tax page says the recovery tax is 15 percent of net world income above a threshold that is reset each year. A taxable capital gain goes into your income, so a large taxable gain in one year can matter for people receiving OAS. A principal residence gain that is fully exempt is not taxed and does not add to income.

If you have a cottage or rental to sell, ask your accountant about timing and how a gain would affect OAS and other income-tested benefits. Do not guess.

Non-resident sellers in brief

If you are not a Canadian resident when you sell, section 116 of the Income Tax Act applies. The vendor must notify the CRA using Form T2062, and a buyer may become liable if no certificate is provided. The CRA's information circular explains the procedure. A non-resident can claim the principal residence exemption only for years of Canadian residence. Speak to a lawyer and an accountant before listing.

Common situations for Waterloo Region sellers

A few patterns come up often. For each, the question to take to an accountant is slightly different.

• You lived in the home throughout and are buying a smaller one. Ask how to designate the home for the years you owned it, and confirm the sale is reported on your return for the year of sale.
• You own a cottage as well as your home. Ask which property to designate for which years, and what that does to the tax on the other.
• You rented a basement apartment or a room. Ask how the CRA treats the rented part, and whether any change in use affected the home.
• You sit on more than half a hectare. Ask whether the extra land is part of the principal residence.
• You are selling soon after buying. Ask whether the 365-day rule applies and whether an exception fits.
• You are selling a parent's home. Ask an estates lawyer first, then an accountant.

None of these answers is on this page, because each depends on dates, use and the family unit. The point is to arrive at your accountant's office with the right question and your records. Gather the agreement of purchase and sale from when you bought, the closing statement from when you sell, and the dates of any period when part of the home was rented or the home was empty. An accountant can do far more with a clear timeline than with a general description, and the CRA's rules turn on dates, use and who is in the family unit for each year.

Questions to bring to your accountant

• Is the home eligible to be designated as my principal residence for every year I owned it?
• Does the plus-one rule apply to the year I sell and buy?
• Will the sale appear on Schedule 3 and Form T2091(IND), and who prepares them?
• Does any part of the lot, or any rented space, change the answer?
• If I have a cottage or a rental, which one should I designate and when?
• Will any taxable gain affect Old Age Security or other income-tested benefits?
• What records do I need to keep, and for how long?

Next steps for a downsizer

Before you list, talk to an accountant about the designation and your filing. Then budget for the other costs of selling. The net proceeds guide and the calculator show the sale-side costs and the land transfer tax on your next home, explained in the land transfer tax guide. The costs and taxes page covers the wider picture, and resources lists who to call.

When you are ready, you can ask for an introduction to an agent on the operating team at eXp Realty. That is not a search of the whole market, and the agent does the listing work.