Capital Gains When You Sell a Home in Ontario: The Principal Residence Exemption and the Anti-Flipping Rule

Why selling your home is often tax-free

When you sell a home for more than you paid, the profit is generally a capital gain. For many Ontario homeowners selling the place they live in, that gain is sheltered by the principal residence exemption in the federal Income Tax Act. The key word is “generally.” The exemption covers only the years the home qualified as your principal residence. It has to be claimed on your tax return. And since January 1, 2023, a home sold within 365 days of buying it can fall under the federal anti-flipping rule, which takes the exemption off the table altogether.

There is no separate Ontario capital gains tax collected on closing. Any taxable gain is reported on your personal return for the year of sale and taxed at your combined federal and Ontario rates. Under current rules, one-half of a capital gain is generally included in income. A 2024 federal proposal to raise that inclusion rate was cancelled in March 2025.

How the principal residence exemption works

CRA’s principal residence guidance and its principal residence folio set out the basic tests. In general, the property has to be a housing unit (a house, condo unit, cottage, or similar) that you own alone or jointly, and that you, your spouse or common-law partner, a former spouse, or your child ordinarily inhabited at some time in the year. Only one property can be designated per family unit for each year after 1981. A family unit generally means you, your spouse or common-law partner, and your unmarried children under 18. The land that comes with the home is usually limited to half a hectare unless you can show more was needed to use and enjoy the home.

The exempt portion of the gain is worked out with a formula. Very roughly, it is the gain multiplied by one plus the number of years you designate the home, divided by the number of years you owned it. That extra year is the “plus one” rule. It is there so that someone who sells one home and buys another in the same year does not lose a year of exemption on either property. If every year of ownership is designated, the whole gain is usually exempt.

You still have to report the sale

For sales in 2016 and later, CRA will generally allow the exemption only if you report the sale and the designation on your return for the year you sold. That means Schedule 3 (Capital Gains or Losses) and Form T2091(IND), Designation of a Property as a Principal Residence by an Individual. Report it even when you expect to owe nothing. A missed designation is not a small paperwork slip. CRA can accept a late designation in certain circumstances, but a penalty may apply: the lesser of $8,000 or $100 for each complete month the designation is late.

Keep your closing package. The purchase price on your statement of adjustments, your legal and commission invoices, and receipts for capital improvements all help your accountant calculate the adjusted cost base and the selling costs. Our guide to the statement of adjustments explains where those closing numbers come from.

When part of the gain becomes taxable

The exemption runs year by year, so the problems usually come from years the home did not qualify, or from a second property competing for the same years.

A cottage or second home is the classic case. A family unit can designate only one property per year. If both the city home and the cottage went up in value, someone has to choose which one carries which years, and the other property’s gain for those years can be taxable. That choice is usually made when the first property is sold, so get advice before that first sale rather than after it.

A full rental property is not a principal residence at all, and selling it can bring both a capital gain and, if you claimed capital cost allowance, a recapture of that depreciation as income. Moving out and renting the home, or moving into a former rental, is generally a change in use. A change in use can be treated as a sale at fair market value even though no money changes hands, and elections may be available to defer or soften that result. Talk to your accountant before you change how the home is used, not when you list it. If the home still has a tenant when you sell, see our guide to selling a tenanted home in Ontario for the vacant-possession side.

Renting a basement suite or running a home office is a narrower issue. CRA’s folio says it usually will not apply the change-in-use rules to part of a home where the income-producing use is ancillary to the main use as a residence, there are no structural changes to the property, and no capital cost allowance is claimed on it. Outside those facts, part of the gain may not be sheltered.

The anti-flipping rule: the 365-day test

For sales on or after January 1, 2023, a housing unit in Canada that you owned for less than 365 consecutive days before the sale is generally a “flipped property.” The rule covers rental units as well as homes you lived in, and it also covers a right to acquire a housing unit, such as assigning a pre-construction purchase agreement before you have held it for 365 days. When the rule applies, the profit is deemed to be business income. It is fully included in income, not half, and the principal residence exemption is not available. If you sell a flipped property at a loss, the loss is deemed to be nil.

The rule does not apply where the sale can reasonably be considered to happen because of, or in anticipation of, one of the life events CRA lists:

• the death of the owner or a related person;
• a related person joining the owner’s household, or the owner joining a related person’s household (for example, a birth, an adoption, or caring for an elderly parent);
• the breakdown of a marriage or common-law partnership, where the owner has lived separate and apart for at least 90 days before the sale;
• a threat to the personal safety of the owner or a related person;
• a serious disability or illness of the owner or a related person;
• an eligible relocation for work or full-time post-secondary study, where the new home is at least 40 kilometres closer to the new work location or school;
• the involuntary termination of the owner’s or their spouse’s or common-law partner’s employment;
• the owner’s insolvency; or
• the destruction or expropriation of the property.

Two cautions. First, fitting a life event does not make the sale automatically tax-free. It only takes the deeming rule away, and the ordinary question of whether the profit is a capital gain or business income still applies. Second, holding a home for more than 365 days does not guarantee capital gains treatment either. CRA can still treat a quick resale, or a pattern of buying, renovating, and selling, as business income on the facts, even after a year. Keep records of why you bought, why you sold, and when your plans changed.

Family ownership, joint title, and non-residents

Who is on title, and why, matters for tax as well as for the deal. Adding a child to title can be a disposition of the share given away, depending on whether beneficial ownership actually changes, and the child’s share generally will not qualify for the exemption in the child’s hands if the child does not live there. Our post on adding a child to title to avoid probate walks through why that plan often backfires. Parents who go on title to help a child buy face the mirror-image problem; see Bank of Mom and Dad in Ontario and transferring title to family in Ontario. How you hold title, as joint tenants or tenants in common, does not change the tax test, but it does change who owns what share when the home is sold.

If you are not a resident of Canada when you sell, the years you were non-resident can reduce or eliminate the exemption, and the “plus one” year is not available if you were non-resident for the whole year you bought the home. A non-resident seller also has to deal with the buyer’s holdback and CRA clearance under section 116, even when the home was a principal residence.

Buying and selling in the same year

Most move-up buyers sell one home and buy the next within the same tax year, often on a same-day purchase and sale or with bridge financing in between. The “plus one” rule generally means you do not lose exemption on the old home for the overlap year, even though only one property can be designated for that year. Overlap of more than a few months, or a gap where you rented out the old home before it sold, is where an accountant’s help pays for itself.

What your real estate lawyer does, and what your accountant does

On a sale by a Canadian resident, your lawyer does not withhold tax for CRA, calculate your gain, or file your designation. A real estate lawyer in Toronto handles the sale itself: the title, the mortgage payout, the statement of adjustments, the closing funds, and, for a non-resident seller, the section 116 process. The capital gains question belongs on your tax return. The useful order is to ask your accountant before you list, especially if there is a cottage, a rental, a change in use, a family member on title, or less than a year of ownership. Our breakdown of closing costs when selling a home in Ontario covers the other deductions from your sale proceeds.

Frequently Asked Questions (FAQ)