Tax Tip Thursday

We get a lot of questions about the principal residence relative to:

• Couples – can they each have one?

• Can you make your cottage or even rental property a principal residence

• Do you have to report the sale of your principal residence

• Can you claim the principal residence for different years for different properties

• Do you need to report the sale to CRA and if so WHY!!!!!!

For Canadians, the principal residence exemption (PRE) has long been a reliable financial planning strategy, allowing homeowners to sell a property without paying capital gains tax on the increase in value.

But for couples with more than one property, the rules are less straightforward – and the stakes can be significant. A second home, a cottage or a property brought into a relationship can turn what appears to be a simple exemption into a series of decisions that affect how much tax is ultimately owed.

As a couple, you can only designate one property for the principal residence exemption at any point in time.

The question is becoming more common as demand for second homes remains resilient, even amid economic uncertainty. According to a 2025 report from Royal LePage, the median price of a recreational home rose modestly over the past year and it is expected to increase further.

The exemption is relatively straightforward: A principal residence is generally a property that a homeowner ordinarily inhabits, and when it is sold, any gain is shielded from tax.

That definition, however, leaves room for more than one property to qualify.

Even if you only live in the property for a couple of months out of the year, it could still qualify for the exemption, referring to seasonal properties such as cottages. The caveat is the property can NOT be used to generate income through short-term rentals.

There is also a home-flipping rule that applies to properties sold after January, 2023.

If you own that property for less than 12 months, it is deemed to be that you are in the business of flipping property and you are automatically disallowed from it being a principal residence.

PRE planning strategies

There is a strategic element for applying the PRE. You can designate any property on a per-year basis.

That flexibility allows homeowners to effectively allocate the exemption over time, but it also forces a choice about where it will have the greatest impact.

You have got to first come up with which property would have a bigger gain, I would designate the exemption toward [that] property.

In practice, that can mean making counterintuitive decisions. A couple who expects their primary home to appreciate more than a cottage, for example, may choose to pay tax on the cottage sale to preserve the exemption for the larger gain down the road.

Advisors say the decision is not purely mathematical.

That can include how long a property will be held, whether it’s intended to remain in the family, and whether it may eventually be converted into a rental.

In some cases, a cottage may be treated less as an investment and more as a legacy asset, shifting how the exemption is used. In other words, time matters, with longer-held, higher-growth assets getting priority.

Common and costly mistakes

Beyond planning decisions, advisors say many of the costliest mistakes arise when homeowners misunderstand how the rules apply in specific situations.

One common oversight is failing to report the sale of a principal residence. Even when the full gain is exempt, the transaction must still be disclosed to the Canada Revenue Agency. The exemption can be disallowed if homeowners fail to report the sale and designate the property as a principal residence on their tax return.

There is a form in the personal tax return … that needs to be reported regardless.

In certain cases, homeowners who convert a home into a rental can defer capital gains tax and continue designating the property as a principal residence for up to four years.

You can file a tax election to defer the capital gains until when you actually sell the property, but do not claim depreciation or capital cost allowance against rental income! Or it negates the ability to defer the capital gains until the sale of the house.

Advisors say the complexity is less about understanding the rules than applying them in the right context — balancing tax efficiency with long-term goals around family, timing and how a property fits into a broader financial plan.

If you own multiple properties and considering selling one of them in the near future – you should definitely seek out advice before completing your taxes for that year.

And last but no least – personal tax deadline is 2 weeks!

If you have a sole proprietorship it is June 15 deadline for filing, but if you owe tax, it is due April 30, so get them some money even if you have not completed your taxes.

If you are a corporation with a December year end – filing deadline is June 30, but your money was already due if you had tax payable, so send them some money!

We can help you navigate the potential tax implications related to your principal residence! Make An Appointment today!

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.