Capital Gains × Principal Residence Exemption (PRE)

Capital gains tax applies when a Canadian-resident seller disposes of real estate at a profit. Federally, 50% of the gain is included in taxable income — the proposed 66.67% inclusion rate on gains above $250,000 was officially cancelled on March 21, 2025, so the inclusion rate is 50% across the board for the foreseeable future. The Principal Residence Exemption (PRE) lets a Canadian-resident individual exempt the gain attributable to years a property was "ordinarily inhabited" as their principal residence, computed across all years owned plus a "+1 year" bonus that covers the year of acquisition of a replacement.

The trap most BC sellers fall into: assuming PRE auto-applies. It does not. Since the 2016 CRA reporting changes, every disposition of a principal residence MUST be reported on Schedule 3 and designated via Form T2091(IND); failing to file triggers a $100/month penalty (max $8,000) and can cost the exemption retroactively. The other trap: only ONE property per family unit per year can be designated. Owners with both a city home and a recreation property (cottage, cabin, ski condo) must allocate years between them, and the math rarely matches intuition — for many families the cottage gets some PRE years even though the city home is "the" principal residence. Multi-property owners should also check the federal anti-flipping rule (365-day hold) and BC Home Flipping Tax (730-day hold) before disposing.