Principal Residence Exemption — BC Seller Reference

The 50% inclusion rate, in 2 sentences

The federal capital-gains inclusion rate is 50% — meaning half of any taxable gain is added to your income for the year of sale. The increase to 66.67% on gains above $250,000 was proposed and then cancelled, on March 21, 2025. The 50% rate is what applies across the board today.

With a full PRE designation, the inclusion is offset to zero. Without it, half the gain is added to your other income and taxed at your marginal rate. On a $500,000 gain in the highest BC bracket that comes to roughly $130,000 of tax. The cost of getting this wrong is large.

Worked examples

Frequently asked questions

• What is the Principal Residence Exemption (PRE)?

  A rule in the federal Income Tax Act that wipes out the capital-gains tax on a home you lived in. It covers each year you designate, provided you or someone in your family unit "ordinarily inhabited" the property that year. A Canadian-resident individual can designate one property per family unit per year. When fully designated for every year of ownership, the PRE eliminates 100% of the capital gains tax on the sale. The PRE is the single largest tax shelter most Canadians ever use — and it does not apply automatically.

• How is capital gain calculated on a BC home sale?

  Start with the sale price and subtract your adjusted cost base — what you paid, plus capital improvements and transaction costs. That difference is the gross capital gain. Half of it is added to your income for the year of the sale; that half is the federal inclusion rate. The 66.67% inclusion rate that was proposed for gains above $250,000 was CANCELLED on March 21, 2025, so the rate is 50% across the board. Without the PRE, that included gain is added to your other income and taxed at your marginal rate. With a full PRE designation for every year owned, the inclusion is offset to zero.

• Do I have to file anything if my entire gain is PRE-exempt?

  Yes. Since the 2016 tax year, every sale of a principal residence must be reported on your personal tax return, on Schedule 3. The exemption itself is claimed on Form T2091, "Designation of a Property as a Principal Residence". This is the single rule most BC sellers do not know exists. Failing to file triggers a penalty of $100 per month, to a maximum of $8,000 — and on audit it can cost you the exemption retroactively. The PRE is not automatic. You report and designate.

• I owned two properties — which one do I designate?

  Only one property per family unit, per year. So if you owned a Vancouver condo and a Whistler cabin at the same time for several years, you have to choose which one gets the exemption for those overlapping years. As a rule, pick the property that gained more per year. There is also a "+1 rule": one bonus year is added to whatever period you designate. It exists so that the year you buy a replacement home does not cost you a year on either property. Where both homes gained a lot, the gap between the best choice and a careless one is often tens of thousands in tax, so it is worth having an accountant run it.

• How does PRE interact with BC Home Flipping Tax?

  They are separate statutes with separate tests, and the federal PRE does not exempt you from the BC tax. PRE (federal) exempts the capital gain on a property you ordinarily inhabited, designated year by year. The BC Home Flipping Tax (provincial) applies to a sale within 730 days of buying: 20% of the profit if you sell inside 365 days, then tapering in a straight line to 0% at day 730. It has its own exemption list for life events — death, serious illness, separation, a work relocation and others. It also has its own relief for owner-occupiers: a deduction of up to $20,000 from the taxable profit. That one requires you to have owned the home at least 365 days and lived in it as your primary residence. The instructive case is a seller at, say, eighteen months. Federally the PRE is available, so the capital gain can be sheltered in full; provincially the flipping tax still applies at a tapered rate, less the $20,000 deduction. The trap is the short hold. Sell inside 365 days and you lose both at once. The federal anti-flipping rule removes the exemption, and the $20,000 BC deduction is out of reach because you did not hold the home a year. Model both before you list, not after.

• How does PRE interact with the federal anti-flipping rule?

  The federal anti-flipping rule took effect on January 1, 2023. Sell residential property you have held less than 365 days and the profit is treated as business income, fully taxable — and the rule removes the exemption for those sales outright. If you sell within 365 days, you cannot claim the PRE on that sale (subject to specific life-event exemptions matching the BC Home Flipping Tax list). After 365 days, capital gains treatment + PRE eligibility return. The practical line: if you sold after 13 months, you may be eligible for full PRE federally. If you sold at 11 months, you owe full federal income tax on 100% of the gain — even if it was your only home.

• I rented out part of my principal residence — does PRE still apply?

  Partly. A basement suite you rent while living upstairs generally does not cost you the exemption. CRA calls that "ancillary" rental use and allows it on three conditions. The renting has to stay secondary to your own use of the home. You cannot have made structural changes to accommodate it. And you cannot have claimed Capital Cost Allowance — depreciation — on the rented portion. If you rented out the full house for several years and lived elsewhere, those years are not eligible for PRE designation. Claiming that depreciation triggers a "change in use", which is treated as though you sold the rented part. Check with your accountant before relying on the exemption for any year with rental income.

• I'm a non-resident selling a BC property — does PRE apply to me?

  Generally no. The PRE is available to a Canadian-resident individual for years they were ordinarily resident in Canada. A non-resident (under the Income Tax Act's residency tests) selling a BC property is not eligible to claim PRE for non-resident years. Additionally, non-residents disposing of "taxable Canadian property" face withholding under section 116 of the Act — typically 25% of the gross sale proceeds withheld until a Section 116 Certificate is obtained from CRA. The withholding is not the final tax; it's a deposit against the actual liability. Non-resident BC sellers should engage a CPA experienced in cross-border real estate tax months before listing.

• What if I forgot to file T2091 in a prior year?

  You amend the earlier return and designate the property then. The form is the T1 Adjustment Request. CRA accepts late designations in many cases, particularly where the omission was accidental and the exemption would have applied anyway. But a late-filing penalty can apply: $100 a month, to a maximum of $8,000. The longer you leave it, the harder the conversation. If you are not sure you filed correctly on a sale in 2021 or 2022, ask your accountant to check. Three years of that penalty is $3,600, and filing now avoids it.

Primary sources: CRA Income Tax Folio S1-F3-C2 (Principal Residence) and CRA Form T2091 (designation).