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Summary: A home that was your principal residence for every year you owned it is exempt from capital gains tax in Canada under the principal residence exemption. You still have to report the sale to the Canada Revenue Agency, and any gain that is not exempt is taxed at the 50% inclusion rate in 2026.
Selling your home and wondering whether the profit is taxed is one of the most common questions sellers ask. For most people selling the home they live in, the answer is reassuring, but there are real exceptions and a reporting step that catches people off guard. Here is how capital gains tax works on a home sale in Ontario, when you owe it, and what the Canada Revenue Agency (CRA) expects you to file.
What is the principal residence exemption?
The principal residence exemption (PRE) is a federal tax rule that shelters the capital gain on your home from tax for every year it was your principal residence. A principal residence is a home that you, your spouse or common-law partner, or your child ordinarily lived in during the year. Because it is a federal rule, it applies the same way in Ontario as across Canada.
Your family unit can designate only one property as a principal residence for any given year. That matters if you own both a house and a cottage, because only one can carry the exemption for each year you owned both.
Do you pay capital gains tax when you sell your home in Ontario?
In most cases, no. If the property was your principal residence for every year you owned it, the PRE exempts the entire capital gain, so you owe no capital gains tax on the sale. This is true regardless of how much the home went up in value.
The catch is that the exemption is not automatic. You have to claim it on your tax return for the year of the sale, which means the sale still has to be reported even when no tax is owed.
When would you owe capital gains on a home sale?
You owe capital gains tax when the home was not your principal residence for every year you owned it, when it was a second property or income property, or when the sale is caught by the anti-flipping rule. The most common situations are:
A second home or cottage. Only one property per family unit can be designated as a principal residence each year, so gains on the other property are partly or fully taxable.
A rental or income property, or a change in use. Renting out your home, or using part of it for business, can trigger a deemed disposition and a partial capital gain. Elections under the Income Tax Act can sometimes defer this, so get tax advice before changing how a property is used.
Years it was not your principal residence. If you lived elsewhere for some of the years you owned the home, the exemption covers only the designated years.
A sale within 365 days. Residential property sold within a year of buying it is generally taxed as business income, not a capital gain, and the PRE does not apply. See our guide to Canada's anti-flipping tax.
How do you report the sale of your principal residence?
Since 2016, the CRA requires you to report the sale of your principal residence even when the gain is fully exempt. Reporting is what secures the exemption, so do not skip it:
Report the sale on Schedule 3 of your T1 income tax return for the year you sold the home.
Designate the property as your principal residence for the relevant years on that return.
File Form T2091(IND) as well if the home was not your principal residence for every year you owned it, so the partial exemption is calculated correctly.
Keep your records of the purchase price, selling costs, and any major improvements, in case the CRA asks you to support the numbers.
Failing to report the sale can lead to a late-filing penalty of $100 per month, up to $8,000, and the CRA can deny the exemption entirely. A quick line on your return protects a potentially large tax-free gain.
How is the taxable gain calculated when a home is not fully exempt?
When a home is not fully exempt, your capital gain is the sale price minus your adjusted cost base (what you paid plus eligible costs) and your selling costs. In 2026, 50% of that gain is taxable and added to your income; the proposed increase to a two-thirds inclusion rate was cancelled in March 2025. The principal residence exemption then reduces the taxable gain by the share of years you designate the home, using a "one-plus" formula: (1 + years designated) ÷ years owned.
Here is how the tax treatment compares between a home you live in and a property you hold as an investment.
Principal residence | Investment or second property | |
Capital gains tax on sale | Exempt under the PRE if it was your principal residence for all years owned | 50% of the gain is taxable |
Must report to the CRA | Yes, on Schedule 3 | Yes, on Schedule 3 |
Designations allowed | One property per family unit per year | Not applicable |
Sold within 365 days | Anti-flipping rule may make it fully taxable business income | Anti-flipping rule may make it fully taxable business income |
For a fuller picture of what a sale costs you beyond tax, see our guide to the costs of selling your home.
Frequently asked questions
Do you pay capital gains tax when you sell your house in Ontario?
Usually not. If the home was your principal residence for every year you owned it, the principal residence exemption shelters the entire capital gain, so no capital gains tax is owed. You still have to report the sale to the CRA and claim the exemption on your return.
Do I have to report selling my home if the gain is tax-free?
Yes. Since 2016 the CRA requires you to report the sale of a principal residence on Schedule 3 of your tax return, even when it is fully exempt. Not reporting can trigger a penalty of up to $8,000 and risk losing the exemption.
Can a couple claim the principal residence exemption on two homes?
No. A family unit, meaning you, your spouse or common-law partner, and minor children, can designate only one property as a principal residence per year. Owning a house and a cottage means choosing which one the exemption applies to for each year.
Do you pay capital gains on a cottage or second property?
Often, yes. Because only one property per family unit can be designated each year, the gain on a second home or cottage is usually partly or fully taxable at the 50% inclusion rate, unless you designate it instead of your main home for some years.
Is the capital gains inclusion rate going up in Canada?
No. The increase to a two-thirds inclusion rate proposed in 2024 was cancelled in March 2025. For 2026, the inclusion rate remains 50% for individuals, so half of a taxable capital gain is included in income.
Does a real estate lawyer handle capital gains tax?
No. Your real estate lawyer handles the closing and the transfer of title, not your income tax filing. Capital gains are reported on your personal tax return, so speak with an accountant or tax professional about how a sale affects you.
About the author
Joel Fox is a co-founder and COO at Ownright. He helps run the firm's day-to-day work on Ontario residential closings, refinances, and sales, and writes regularly to demystify the parts of a transaction that most homeowners only encounter once or twice in their lives.
At Ownright, we make Ontario real estate closings simple, transparent, and fully supported, pairing a digital platform with licensed Ontario lawyers across purchases, sales, refinances, and status certificate reviews. We handle the legal side of your sale, not your tax return, so we work alongside your accountant. You can start your closing online or get in touch with any questions.
Legal references: Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), s. 40(2)(b) and s. 54 (definition of principal residence); Canada Revenue Agency reporting requirements for the sale of a principal residence.
Important note: This article is not legal advice. No one should act, or refrain from acting, based solely on the information in this post or any linked materials without first seeking appropriate legal or professional advice.
