Lots of people assume the principal residence exemption only covers the house they live in most of the year. For a family that spends summers at the lake, a cottage can qualify too. Choosing which property to designate can save a meaningful amount of tax, so it is worth understanding before you sell either one.
The basic rule
- A property can be designated as your principal residence for a year if you, your spouse or common-law partner, or your children ordinarily inhabited it during that year. Seasonal use of a cottage generally counts.
- Since 1982, only one property per family unit can be designated for each year. Your family unit is you, your spouse or common-law partner, and your unmarried children under 18.
- If you designate the cottage for a year, the city home cannot be designated for that same year.
Long-held family cottages bought before 1982 can have different rules for the early years. If your cottage goes back that far, tell your accountant.
How the exempt part is calculated
The exempt part of the gain uses this formula:
The extra “1” is called the plus-one rule. It exists so a family that sells one home and buys another in the same year does not lose a year of exemption. It is not available if you were a non-resident of Canada in the year you bought the property.
A worked example
A couple owned a city home and a cottage for the same 10 years. They sell both.
| City home | Cottage | |
|---|---|---|
| Gain over 10 years | $500,000 | $300,000 |
| Gain per year | $50,000 | $30,000 |
| Years designated | 9 | 1 |
| Exempt share | (1 + 9) ÷ 10 = 100% | (1 + 1) ÷ 10 = 20% |
| Taxable gain before the 50% inclusion | $0 | $240,000 |
In this simplified example, both properties meet the principal-residence conditions and the owners were Canadian residents in each acquisition year. The plus-one calculation can affect the allocation of designation years. An accountant should compare the actual ownership dates, occupancy, residence status and gains before choosing the years.
When to make the choice
You do not choose in advance. The designation is made when you sell, or when a property is deemed sold, for example at death. When you sell the first property, think about whether you want to save years for the other one. Many families sell the city home first and decide then.
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Reporting the sale
- Every sale of a principal residence has to be reported on Schedule 3 of your tax return, since the 2016 tax year.
- CRA generally requires Schedule 3 and Form T2091(IND) when you designate a property as your principal residence. Follow the forms for the disposition year.
- Late designations can be accepted, with a penalty of $100 per month up to $8,000.
If you rent the cottage out
Renting out the entire cottage can be treated as a change in use, which is a deemed sale. A section 45(2) election can avoid that and extend the exemption for up to four years, but you cannot claim depreciation on the property while it is in effect. Occasional rental of a family cottage is treated differently from renting it full time. Read renting out your cottage and ask your accountant.
When the cottage becomes your home
If you retire to the lake and sell the city house, the cottage becomes your main home from then on. The years before that still follow the one-per-family rule. Our guide to retiring to the cottage covers the money side.
Common mistakes to avoid
- Assuming the city home is automatically the principal residence and never looking at the cottage numbers.
- Forgetting to report the sale on Schedule 3, then paying a late-designation penalty.
- Using up years on the first sale that would have saved more tax on the second property.
- Losing the purchase and improvement records for a cottage held for decades.
- Renting the whole cottage without asking an accountant about the change-in-use rules.
Keep records
Keep the purchase price, closing costs and invoices for capital improvements on both properties. A higher cost base means a lower gain, which helps whichever property is not fully exempt. For the bigger picture, see passing the cottage to your kids.
Questions people ask
Can I claim my cottage as my principal residence?
Can I designate my cottage as principal residence for some years?
What is the plus-one rule?
Can a couple each designate a different property?
Do I have to report the sale of my principal residence?
Does renting my cottage affect the principal residence exemption?
Sources
- CRA: Capital gains guide (checked 2026-10-12)
- CRA: Principal residence and other real estate (checked 2026-10-12)
- Ontario: Estate Administration Tax (checked 2026-10-12)
- Justice Canada: Underused Housing Tax Act, section 1.1 (checked 2026-10-12)