Principal Residence Exemption in 2027: How It Works and Who Loses It

By Jatin Dua · Broker of Record, RE/MAX Quantum Realty · Updated 2 November 2026 · 10 min read — The formula, the T2091 form, basement rentals, cottages and the common ways Canadian owners lose a tax-free home sale in 2027.

This guide is for Canadian homeowners, especially in Toronto and the GTA, who plan to sell in 2027 and want to make sure the gain on their home stays tax-free. You will learn how the principal residence exemption works, the formula behind it, the form you must file, and the situations where people lose part or all of it, as of November 2026. I am a broker, not a tax adviser, so confirm your own case with an accountant.

What is the principal residence exemption in Canada?

The principal residence exemption (PRE) lets you sell your home without paying tax on the gain for each year it was your principal residence. If a home qualified for every year you owned it, the whole gain is usually tax-free.

The Canada Revenue Agency (CRA) says a property can qualify for a year if all of these are true:

• It is a housing unit: a house, cottage, condo, apartment in a duplex or apartment building, trailer, mobile home or houseboat, or a share in a co-op that gives you the right to live there.
• You own it, alone or with someone else.
• You, your spouse or common-law partner (current or former), or your child lived in it at some time during the year. The CRA’s technical guide says even a short stay in the year can be enough.
• You designate it as your principal residence for that year.

The land that comes with it is usually limited to half a hectare (about 1.24 acres). More land can qualify only if you show it is needed to use and enjoy the home, for example because of a minimum lot size rule.

How does the principal residence exemption formula work?

When a property was not your principal residence for every year, the CRA uses a formula. The exempt part of the gain is:

Gain × (1 + number of years designated) ÷ number of years owned

The “plus one” is there so you are not penalized in the year you sell one home and buy another, when you technically own two. You only get the plus one if you were a resident of Canada in the year you bought the property.

Here is an illustrative example for a family that owns a city house and a cottage, both bought in 2012, and sells the cottage in 2027:

Illustrative numbers only. Formula from CRA Income Tax Folio S1-F3-C2, Principal Residence; inclusion rate per CRA Guide T4037.

The catch: those five years now cannot be used for the city house. A family can designate only one home per year, so you are choosing where to spend each year of exemption.

How do I report the sale of my principal residence?

Since the 2016 tax year, you must report the sale on your return to claim the exemption, even if no tax is owed. You use two forms:

• Schedule 3 (capital gains), where you tick the box for the principal residence designation.
• Form T2091(IND), the designation form. If the home was your principal residence for all the years you owned it, or all but one, you only complete page 1.

You file these with the return for the year of the sale. Under current law that is 30 April of the following year. Budget 2026 proposes a 15 May deadline for individuals, starting with the 2027 tax year, so a 2027 sale might be due by 15 May 2028 if the change becomes law.

If you forget, ask the CRA to amend your return. The CRA can accept a late designation, but a penalty can apply: $100 for each complete month from the original due date, up to $8,000. The CRA says it generally waives this penalty except in the most serious cases. That is not a reason to skip the form.

Who loses the principal residence exemption?

These are the situations where I see owners lose some or all of it:

• Selling within 365 days. Under the residential flipping rule, a home owned less than 365 consecutive days is treated as business income and the exemption is not available, unless a listed life event such as death, separation, serious illness, job loss or an eligible work move caused the sale.
• Two homes in one family. Since 1982, only one home per family unit can be designated for each year. For 1993 and later years, the family unit is you, your spouse or partner (unless separated for the whole year) and your unmarried children under 18.
• Years as a non-resident. Only years you were a resident of Canada count, and the plus one needs residency in the year you bought.
• A structural conversion. Turning part of your home into a separate self-contained rental unit is a change in use for that part.
• Claiming depreciation. Claiming capital cost allowance on the home, or the rented part, can undo protections that would otherwise keep it a principal residence.
• Too much land. Land over half a hectare usually does not qualify.
• Owning through a partnership. A partnership cannot claim the exemption, although a partner may claim it on their share of the gain.

Can I rent out part of my home and keep the exemption?

Often yes. The CRA’s guide says the whole property usually keeps its principal residence status when all three of these are true:

1. The income use is ancillary (secondary) to your use of the home as a residence.
2. There is no structural change to the property.
3. You do not claim capital cost allowance on it.

The CRA gives renting one or more rooms, running a home daycare or having a home office as examples that fit. You can still deduct other expenses for the rented part.

A basement turned into a self-contained apartment with its own kitchen and entrance is different. The CRA lists converting part of a house into a self-contained unit for rental income (a duplex or triplex) as a substantial, permanent change. That part can lose principal residence status from the date of the change. With Toronto allowing up to four units as of right city-wide since 2023, this matters to a lot of owners. Get advice before you build.

What happens if I rent out my whole home or move back in?

Changing a home to a rental, or a rental to a home, is treated as selling it at market value on the day of the change. Two elections can defer that:

• Section 45(2) election (home becomes a rental). You can keep designating it as your principal residence for up to four years while it is rented, as long as you claim no capital cost allowance. If you claim it, the election is cancelled.
• The relocation extension. The four-year limit can be removed if you move for work with an unrelated employer, your new home is at least 40 km closer to the new workplace, and you move back in while with that employer or by the end of the year after you leave it.
• Section 45(3) election (rental becomes your home). This can defer the gain when you move into a former rental and let you designate it for up to four years before the change, but not if depreciation was claimed for those years.

The timing and wording of these elections matter. My guide to the change-of-use election goes through the sequence step by step.

Is Toronto’s Vacant Home Tax principal residence the same as the CRA’s?

No, and mixing them up causes trouble. They are separate tests for separate taxes.

Source: CRA principal residence pages and Income Tax Folio S1-F3-C2; City of Toronto Vacant Home Tax page.

A Toronto condo you live in for four months a year can be your principal residence for the CRA and still be “vacant” for the City, unless an exemption applies. My Toronto Vacant Home Tax guide covers the City side.

What happens to the exemption on separation, death or a gift to family?

Separation. Spouses who are separated for the whole year under a court order or written agreement are no longer one family unit for that year, so each can designate a different home. My guide to selling the matrimonial home after separation covers the practical side.

Death. When an owner dies, the CRA treats their property as sold at that time. The executor reports that deemed sale on the deceased’s final return, where the exemption can be claimed for the years the home qualified. See my guide to selling a house after a death in Ontario.

Gifts. Giving property (other than cash) to a family member is also treated as a sale by you. Adding a child to title can have tax effects too, so talk to your lawyer and accountant first.

One market note for 2027: prices have fallen since 2024 in much of the GTA and in cottage areas. For example, detached medians fell 7.0% in Georgina and 10.2% in Brock between January–October 2024 and the same period of 2026 (TRREB MLS data via REALM). A second home bought near the peak may have a small gain, which changes which property is worth sheltering.

What to do next

1. List every year you owned the home and who lived there each year.
2. Check for any year it was rented, used for business, or converted, and whether you claimed depreciation.
3. If you own two homes, estimate the gain per year on each with your accountant before choosing which to designate.
4. Get a current value for your home with the estimator above so the gain is based on a realistic price.
5. When you sell, file Schedule 3 and Form T2091(IND) with your return, and declare your Toronto Vacant Home Tax status separately.

Frequently asked questions

Sources

• Canada Revenue Agency: Principal residence and other real estate
• Canada Revenue Agency: Income Tax Folio S1-F3-C2, Principal Residence
• Canada Revenue Agency: Reporting the sale of your principal residence (late designation penalty)
• Canada Revenue Agency: Form T2091(IND)
• Canada Revenue Agency: Residential property flipping rule
• Canada Revenue Agency: Guide T4037, Capital Gains 2025
• Budget 2026: Tax measures, supplementary information (filing date proposal)
• City of Toronto: Vacant Home Tax

Related reading

• Average Property Tax in Toronto for 2027: Per Year, Per Month, by Home Value
• Toronto Property Tax Due Dates and Payment Options Explained
• GTA Property Tax Rates Compared: Toronto, Mississauga, Brampton, Vaughan and More
• Property Tax on Vacant Land in Ontario: How It Works