Using the Principal Residence Exemption

In keeping with the trend of Canadian tax topics from the last couple of weeks, this week we will look at the primary residence exemption. This is likely one of the most wide-reaching tax topics that affect the majority of Canadians.

However, even though this tax exemption helps the average Canadian immensely, there are still people advocating for its removal. In what follows we will look at what the principal residence exemption is, how it works, and the effects if it were to get removed.

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What is the Principal Residence Exemption

The principal residence exemption is designed to reduce or eliminate a capital gain associated with a person’s principal residence. In order to claim the exemption, it is important to understand what qualifies as a principal residence.

A principal residence can be any of the following:

  • A house
  • A cottage
  • A condo
  • An apartment in an apartment building
  • An apartment in a duplex
  • A trailer, mobile home, or houseboat.

Many people will have two or more of the properties listed above. However, each household can only have one primary residence in a given tax year (Note: you do not have to elect a given residence as your primary each year. More on this below).

So, even though you own a house or a condo there are some conditions that must be met for it to qualify. It must meet the following 4:

  • Is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation.
  • Property is owned alone or jointly with another person.
  • You, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year.
  • You designated that property as your principal residence.

Furthermore, the land that your house is located on can also qualify. This is generally only up to 1.25 acres unless you can prove that more land should qualify.

How it Works

Using an example is probably the easiest way to explain how it works.

John bought a house back in 2000 for $150,000. Jane also bought a house in 2000 for $100,000. In 2005, John and Jane get married and decide to live in John’s house, keeping Jane’s as a rental property.

In 2010, John and Jane purchase a cottage at their favorite lake for $250,000. To afford the cottage they decide to sell the rental property that is now worth $180,000. The house was owned by Jane for five years, and then by Jane and John for an additional five years. There is a capital gain of $80,000, split over the 10 years of ownership, which is $8,000 of cap gain per year. The house only qualifies for the principal residence exemption for the 5 years prior to John and Jane meeting. This means that $40,000 of the capital gain will be tax-free and $40,000 will be taxable to the holder of the property.

In 2015, John and Jane decided that it is time to upgrade their house. They sell their current home that John bought in 2000 for $150,000. In 2015, it was worth $325,000. That accounts for a $175,000 in capital gain. The five years from 2000-2005 John would claim the house as his primary residence. For 2005-2010, they had two houses but the rental would not qualify as a primary residence. From 2010-2015, they owned John’s house and the cottage. A couple can only have one principal residence in any given year. They will have to decide if they want to designate the house or the cottage as the principal residence for that five-year period.

To use the principal residence exemption in the most tax-efficient way, it would be best for John and Jane to elect whichever property has increased in value the most from 2010-2015. Let’s assume that the cottage appreciated faster than their house. Upon the sale of their house, they choose to elect the principal residence exemption from 2000-2010. They owned the house for 15 years and had a gain of $175,000. This means that 10/15 of the $175,000 is tax free ($116,666), and 5/15 of the $175,000 is taxable ($58,333).

In 2020, John and Jane decide to sell their current house and their cottage. They have decided that they want to spend a couple years traveling as much as possible. They would elect the cottage as their primary residence from 2010-2015. However, they would then have to decide if they want to elect their house or their cottage as the primary residence for 2015-2020. Again, the most efficient way would be to elect the property that increased in value the most.

Consequences of Removing Principal Residence Exemption

As mentioned earlier, the principal residence exemption is one of the most widely accessed tax exemptions. The homeownership rate in Canada as of 2018 was 68.55%. Most of those people will have access to the principal residence exemption if they meet the criteria mentioned earlier.

According to StatsCan, the median net worth of $329,900 in 2019. Other sources claim that the average Canadian household has more than $1 million in total assets, even after accounting for debt.

A large portion of Canadian’s net worth is tied up in their houses. This has been exacerbated in the last two years. The average house value in Canada as of September 2021 was $686,650. The average Canadian mortgage debt, depending on the source you look at, is around $73,532 – $92,320.

According to those averages mentioned above, Canadians have roughly $600,000 of equity in their homes. If we assume they have $1,000,000 in assets after accounting for debt, that means 60% of their assets are in the house.

A reality for many Canadians will be that they will eventually have to sell their house to fund their retirement. If 60% of the assets that people are counting on for retirement are suddenly susceptible to capital gains tax, there will be a lot less available for income needs.

Not only will the average Canadian have fewer assets to fall back on, eliminating the principal residence exemption could increase the number of people living off government programs. It could also deflate the price of housing. A primary residence is no longer a tax-free investment so there will be fewer people looking to purchase homes.


The government has been spending and handing out money with what seems like reckless abandon. Now to make up for that, they want to increase taxes. By taking away the principal residence exemption it will likely increase the number of people reliant on government programs. It will also likely deflate the housing market. In turn with lower housing prices, people’s net worth could also take a severe hit. Therefore, limiting their assets to fall back on even further.

All in all, eliminating the principal residence exemption seems like an unwise move. But let us know your thoughts. Should the Canadian government remove the exemption? Should they modify it? Leave a comment below.

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Disclaimer: This Forbes Wealth Blog is for informational purposes only and does not constitute financial, legal, or tax advice of any kind. Please consult your legal, accounting, tax, investment, banking, and life insurance professionals to get precise advice relating to your particular situation before acting upon any strategy