Principal Residence Exemption at Death in Canada

Last updated July 4, 2026 · 5 min read
Quick answer
The Principal Residence Exemption (PRE) is a Canadian tax rule allowing capital gains on a principal residence to be exempt from tax. At death, the deemed disposition (which normally triggers capital gains tax) applies — but if the property qualifies as principal residence, the PRE can eliminate or substantially reduce the tax. Key requirements — property must be 'ordinarily inhabited' by the family during the years claimed; only one property can be designated as principal residence per family per year. For most Canadians with single family home, PRE eliminates capital gains tax on the home at death. Specific elections required when multiple properties (cottage plus city home) — designate one for each year to maximize exemption. The designation is made on Form T2091 (IND) for a sale during life, or on Form T1255 when the legal representative of a deceased person designates the residence on the final return.

The Principal Residence Exemption (PRE) is one of the most valuable tax benefits Canadian families have. At death, it can eliminate or substantially reduce capital gains tax on the family home.

What the PRE does

Allows capital gains on a property qualifying as principal residence to be exempt from tax:

During life — When selling principal residence, capital gain exempt.

At death — Deemed disposition triggers capital gains, but PRE can eliminate or reduce the tax.

This is one of the most valuable tax breaks Canadians have.

How it works at death

When a Canadian dies:

  • All capital property deemed sold at fair market value
  • Capital gains realized
  • 50% inclusion rate
  • Taxed at marginal rate on final T1 return

Except where Principal Residence Exemption applies.

For property qualifying as principal residence for all years owned:

  • Capital gain calculated
  • PRE eliminates the gain
  • No tax on the family home

Requirements for PRE

Ordinarily inhabited

The property must be "ordinarily inhabited" by the taxpayer or a member of their family during the years claimed.

Family includes:

  • Spouse or common-law partner
  • Children (and specific dependents)

"Ordinarily inhabited":

  • Used as a residence
  • Not necessarily year-round
  • Specific to circumstances
  • Cottages can qualify if seasonal residence

One property per family per year

Only one property can be designated as principal residence per family unit per year.

Family unit:

  • Married/common-law couple, plus their unmarried children under 18, counted as one
  • Specific to circumstances

Multiple properties:

  • Strategic designation across years
  • Specific to maximize total exemption

Owned by the deceased

The property must be owned by the deceased (sole, joint with right of survivorship, or specific other ownership).

The calculation formula

Standard formula:

Exemption fraction = (Number of years designated as principal residence + 1) ÷ Total years owned

The "+1" accounts for the year of disposition/death.

Example 1 — single home owned 30 years, designated all years:

  • (30 + 1) / 30 = 1.033 (capped at 1.0)
  • 100% of gain exempt
  • No tax on family home

Example 2 — cottage owned 30 years, principal residence 10 years (other years designation went to city home):

  • (10 + 1) / 30 = 0.367
  • 36.7% of gain exempt
  • 63.3% of gain taxable
  • Specific calculation

Multiple properties scenario

Common situation — family owns city home and cottage.

Strategic designation:

  • Each property must have specific years designated
  • Designate the property with higher per-year capital gain
  • Specific to maximize total exemption

Example:

  • City home owned 30 years, gained $500,000
  • Cottage owned 20 years, gained $300,000

Per-year gain:

  • City home: $500,000 / 30 = $16,667/year
  • Cottage: $300,000 / 20 = $15,000/year

Designate city home for all 30 years → maximize city home exemption. Cottage exemption only for the +1 year → cottage substantially taxable.

Specific calculation based on actual numbers; specific to circumstances. Tax planning warranted.

Specific scenarios

Sale during life

When selling principal residence during life:

  • Capital gain calculated
  • PRE designation made on tax return
  • Form T2091 filed
  • Gain exempt if designation full

Death — family home

Most common scenario:

  • Deemed disposition at death
  • Principal residence designation continued through death, made by the legal representative on Form T1255 filed with the final return
  • No capital gains tax on family home
  • Property passes to beneficiaries at fair market value (their cost base)

Death — cottage and city home

More complex:

  • Deemed disposition on both
  • Designation strategy on final T1 return, using Form T1255 for the deceased's residence designation
  • Specific to maximize total exemption across both
  • Lawyer and accountant typically involved

Foreign property

Foreign property can qualify as principal residence if "ordinarily inhabited":

  • Specific to circumstances
  • Form T2091 filing
  • Specific cross-border considerations

Rental of principal residence

Renting out home affects PRE:

  • Years rented out may not qualify
  • Specific elections available (specific Income Tax Act provisions)
  • Specific to circumstances

Change of use

Change from principal residence to rental (or vice versa) has specific tax implications:

  • Deemed disposition at change of use
  • Specific elections available
  • Specific to circumstances

Form T2091 and Form T1255

Form T2091 (IND) — Designation of a Property as a Principal Residence by an Individual is the form used to designate the residence on a sale during life. It is filed with the tax return claiming the exemption.

Form T1255 — Designation of a Property as a Principal Residence by the Legal Representative of a Deceased Individual is the equivalent form for a deceased taxpayer. The executor (legal representative) files it with the deceased's final return to make the designation for the deemed disposition at death.

Reporting the disposition — on Schedule 3, and on T2091 or T1255 as applicable — has been required since 2016 even where the exemption covers the full gain (CRA changed reporting requirements). Failure to report may eliminate the exemption.

Spousal rollover interaction

For property passing to spouse:

  • Spousal rollover applies (tax-deferred transfer)
  • No deemed disposition triggered for spouse
  • Spouse inherits at deceased's cost base
  • Specific to circumstances

When spouse later disposes (or dies):

  • Spouse's deemed disposition
  • Specific PRE for spouse's principal residence years

Practical implications

For most Canadians

Single family home owned all of adult life:

  • PRE eliminates capital gains at death
  • No tax issue on family home
  • Property passes to beneficiaries at fair market value

For Canadians with cottage

  • Strategic designation essential
  • Substantial capital gains tax possible without optimal designation
  • Specific tax planning warranted

For Canadians with foreign property

  • Specific cross-border considerations
  • Possible designation as principal residence
  • Specific tax planning

For Canadians with rental property

  • Doesn't qualify as principal residence during rental period
  • Full capital gains tax on deemed disposition
  • Specific tax planning

Specific to estate planning

During life:

  • Strategic ownership structuring
  • Consider joint tenancy implications
  • Specific to circumstances

At death:

  • Executor must designate principal residence
  • Strategic designation across multiple properties
  • Specific accountant involvement

For substantial property holdings:

  • Tax planning essential
  • Specific to circumstances

What we focus on at It's Simple Will

The Will Creator addresses property bequests. For PRE planning and substantial real estate holdings, accountant consultation is essential — the tax implications can be very substantial.

Citations & sources

  1. [1]Canada Revenue Agency — Principal Residence and Other Real Estate — Canada Revenue Agency
  2. [2]CRA Form T2091 — Canada Revenue Agency
  3. [3]CRA Form T1255 — Designation of a Property as a Principal Residence by the Legal Representative of a Deceased Individual — Canada Revenue Agency
  4. [4]Income Tax Act, Section 40(2)(b) Principal Residence Exemption — Government of Canada / Department of Justice

Frequently asked questions

What is the Principal Residence Exemption?

Canadian federal tax rule that allows capital gains on a property qualifying as principal residence to be exempt from tax. Designed to prevent taxation when families sell their home. Applies during life (when selling) and at death (deemed disposition).

How does it work at death?

When a Canadian dies, all capital property is deemed sold at fair market value (deemed disposition). Capital gains realized — except where Principal Residence Exemption applies. For property qualifying as principal residence for all years owned, exemption eliminates capital gains entirely.

What if I had a city home and cottage?

Only one property can be principal residence per family per year. Must designate which property is principal residence for which years. Strategic designation to maximize total exemption across multiple properties.

How does the calculation work?

Formula — (Number of years property designated as principal residence + 1) ÷ Total years owned = exemption fraction. For property owned 20 years and designated all 20 years, full exemption. Specific calculation if mixed use or specific circumstances.

What about cottages?

Cottages can be principal residences if 'ordinarily inhabited' (specific to cottage use). Strategic designation may favour cottage over city home in some years if cottage appreciated more. Specific to circumstances; tax planning warranted for substantial cottage value.

Form for designation?

Form T2091 (IND) — Designation of a Property as a Principal Residence by an Individual — is filed with the tax return for a sale during life. When the taxpayer has died, the legal representative instead files Form T1255 — Designation of a Property as a Principal Residence by the Legal Representative of a Deceased Individual — with the final (terminal) return. Specific to circumstances.

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