Perhaps the biggest tax break remaining for ordinary Canadians is the principal residence exemption (PRE), which allows individuals to realize an unlimited tax-free gain upon the sale of their home. Contrast that to the U.S. where the exemption is currently limited to US$250,000 for single filers (US$500,000 for married couples filing jointly), although last month, a bill was introduced in the U.S. that would provide an unlimited exemption just like in Canada.

Under our tax rules, if you do sell your principal residence, as of 2016 you need to report that sale on your tax return even if it fully qualifies for the PRE. The designation of your principal residence is reported on the front page of

Schedule 3

of your return, and you must also complete the appropriate sections of

Form T2091

(IND), Designation of a Property as a Principal Residence by an Individual.

For a property to qualify as your principal residence for a particular tax year, four criteria must be satisfied: 1. the property must be a housing unit; 2. you must own the property (either alone or jointly with someone else); 3. you or your spouse (or common-law partner) or kids must “ordinarily inhabit” the property and 4. you must “designate” the property as a principal residence.

Note that a seasonal residence, such as a cottage, cabin, lake house or even ski chalet, can be considered to be “ordinarily inhabited in the year” even if you only use it during vacation periods “provided that the main reason for owning the property is not to gain or produce income.”

A rental property, however, is generally not considered a principal residence, and you could be on the hook for

capital gains tax

when you sell it. Similarly, you may be precluded from claiming the PRE if you bought or built a home with the purpose of selling it for a profit.

In recent years the government has been cracking down on residential house flipping. New anti-flipping rules for

residential real estate

(including rental properties) came into effect Jan. 1, 2023, and were designed to “reduce speculative demand in the marketplace and help to cool excessive price growth.”

The rules prevent you from claiming the PRE to shelter the

capital gain

realized on the sale of your home if you’ve owned it for less than 12 months. And, any gain on the sale of residential real estate held under 12 months is taxable not as a 50 per cent capital gain, but rather as 100 per cent taxable business income, subject to certain exemptions for life events such as death, disability, separation and work relocation.

If you sold residential real estate (including a rental property) that you owned for less than 365 days, you are obligated to declare that sale on Part 2 of the Schedule 3 of your personal tax return for the year of sale.

And, although the flipped property rules only came into play for 2023 and future years, the

Canada Revenue Agency

can still challenge real estate flips that took place prior to 2023 if it feels a taxpayer has speculated and flipped a property for a quick profit.

In recent years, the CRA has also been cracking down on perceived abuse of the PRE even when properties are held for more than a year. Take the recent decision of the Tax Court, decided in June 2025, involving a Toronto taxpayer whose 2016 tax return was reassessed by the CRA because he failed to report a capital gain of $159,282 on the sale of residential real estate. To make matters worse, he was also hit with a $21,000 gross negligence penalty for failure to report the gain.

The taxpayer, an avid investor who was “particularly fond of real property,” purchased several properties along a certain portion of Toronto’s Yonge Street between 2010 and 2017. In 2016, the taxpayer sold multiple real estate holdings.

One of these properties was his principal residence in which he lived from May 2010 to July 2016. The CRA allowed him to claim the PRE on the sale of this property even though he failed to report its disposition on his 2016 tax return.

The taxpayer also failed to report the disposition of a second property sold at a gain in 2016, claiming that it was “always intended as a principal residence.” This claim was rejected by the CRA for a variety of reasons, including the fact he never resided at the property, did not file a T2091 to report it and already had a different principal residence at the same time in the same taxation year.

Unfortunately, this was not the first time the taxpayer failed to report a disposition of real estate. It turns out that in 2011 the taxpayer was also reassessed, penalized and “red flagged for future vigilance by the (CRA)” for failure to report a sale.

In his defense, the taxpayer claimed that he reviewed his 2016 tax return with his accountant, reported the disposition of two other properties he sold in 2016, but omitted the gain on his principal residence and the property in question, believing that the gains were sheltered by the PRE.

The taxpayer blamed his accountant for failing to disclose the sale of his principal residence since 2016 was the first year this was required and his “accountant likely was ignorant” of the need to report it. When asked why his accountant didn’t testify, the taxpayer said it was because he had “moved to the States.”

But the judge wasn’t buying this excuse, noting that the taxpayer had a master’s degree, was experienced in real estate and even became a licensed real estate broker in 2022. The judge upheld the CRA’s assessment of the unreported gain.

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The judge also concluded that in failing to report any disposition from the sale of the property, the taxpayer “knowingly or under circumstances amounting to gross negligence” made a false statement or omission on his 2016 tax return. Consequently, the CRA was justified in levying a gross negligence penalty for failure to report the gain associated with the sale of the property.

Jamie Golombek,
FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto.
Jamie.Golombek@cibc.com

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