Designating a Property as a Principal Residence

In general, half (50%) of the capital gain realized on the disposition (sale, transfer, exchange, gift, etc.) of a property is taxable.

However, under certain conditions, you can avoid paying tax on all or part of the capital gains by designating the property as your principal residence.

Note
Note attention

To claim this tax exemption, you must complete form TP-274-V, Designation of Property as a Principal Residence, and include it with your income tax return for the year of sale.

If you do not send us this form, you are liable to a penalty of $100 per month, to a maximum of $5,000.

End of note

Years covered by the designation

If you designate a property as your principal residence for all the years you owned it, none of the capital gains will be taxable.

If you do not designate the property as your principal residence for all the years you owned it, part of the capital gains will be taxable.

Note
Note attention

To designate a property as your principal residence for one or more years during which you owned or co-owned it, you must first have made an election concerning a change in the use of the property for the same years with the Canada Revenue Agency (CRA). Keep proof that you made the election with the CRA in case we ask for it.

For more information, see Principal Residence and Other Real Estate on the Government of Canada website.

End of note

Conditions for designation

You can designate a property as your principal residence for a given year only if you, your spouse, your former spouse or your child ordinarily used the property as a residence during that year, even if occupation was only short term.

You can designate only one property as your principal residence for a given year.

For more information on the conditions for designating a principal residence, see the section of the guide Capital Gains and Losses (IN-120-V) dealing with a principal residence.

Example of the tax exemption resulting from a principal residence designation

In 2000, Peter and his spouse Mary bought a house for $300,000. In 2010, they bought a cottage for $200,000. They and their children, Felix and Sarah, are the only occupants of the house and cottage.

In 2022, they sell their cottage for $550,000 and learn that their house has a fair market value of $550,000.

They realize a capital gain of $350,000 on the sale of their cottage (sale price of $550,000 minus the purchase price of $200,000). This amount is higher than the capital gain of $250,000 that could potentially be realized if they sold their house ($550,000 minus $300,000). Therefore, they decide to designate their cottage as their principal residence for 8 of the 12 years they owned it. They are aware that the law grants an additional year when calculating the tax exemption.

Calculating the tax exemption

Following the instructions in form TP-274-V, Peter and Mary do the following calculation:

A multiplied by B divided by C.A × B ÷ C, where:

  • A is the capital gain realized on the sale of the cottage;
  • B is the number of years the cottage was designated as the principal residence plus 1 (additional year granted under the law);
  • C is the number of years they co-owned the cottage.

According to the calculation, Peter and Mary can claim a tax exemption of $262,500, the result of 350,000 dollars multiplied by (open parenthesis) the sum of 8 plus 1 (close parenthesis), divided by 12$350,000 x (8+1) ÷ 12.

Only the part of the capital gain that exceeds the exemption will be used to calculate income tax. In this case, the excess amount is $87,500 ($350,000 minus the $262,500 exemption). As only half of a capital gain amount is taxable, Peter and Mary will be taxed on only $43,750 (50% of $87,500) in capital gains resulting from the sale of their cottage in 2022.

Impact on the future sale of their house

When Peter and Mary decide to sell their house, they will have to complete form TP-274-V again to designate their house as their principal residence. However, this designation cannot cover the same eight years their cottage was designated as their principal residence.

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