Skip to main content
Open this photo in gallery:

Clients thinking about selling their second home to avoid the higher capital gains inclusion rate should consider using the principal residence exemption on their vacation property.LesPalenik/iStockPhoto / Getty Images

Sign up for the Globe Advisor weekly newsletter for professional financial advisors on our sign-up page. Get exclusive investment industry news and insights, the week’s top headlines, and what you and your clients need to know. For more from Globe Advisor, visit our homepage.

Some Canadians who own more than one personal-use property – for example, a home and a cottage – may be considering selling these assets prior to June 25 to avoid exposure to the higher capital gains inclusion rate proposed in this year’s federal budget. But before they make a rash decision, they should consider how the principal residence exemption (PRE) can be used to eliminate or reduce taxes on the sale of a personal-use property.

The PRE is available to those who own homes they’ve “ordinarily inhabited.” According to the Canada Revenue Agency’s Income Tax Folio S1-F3-C2, “Even if a person inhabits a housing unit only for a short period of time in the year, this is sufficient for the housing unit to be considered ordinarily inhabited in the year by that person.”

That means the PRE doesn’t only have to be used on the home in which a client sleeps most nights, it can also be used on their vacation home, which they might only inhabit for a short period of time each year.

Clients thinking about trying to sell their second home primarily to avoid the higher capital gains inclusion rate – which will go up to two-thirds from half on personal capital gains of more than $250,000 in a given taxation year – should consider whether they would still sell it if they knew they may not need to pay taxes on that home at all. Instead, they could claim the PRE on their vacation home and then pay the capital gains tax when they sell their regular home. That’s particularly important if the gain on the vacation home is much higher than the gain on the regular home.

Strategic tax planning with the PRE is now more important

The PRE is a year-by-year claim. If clients use the PRE for one property for any given year, then it’s no longer available for any other property that year. This year-by-year election is made on form T2091 on a personal tax return for the year in which a qualifying property is sold.

Generally speaking, clients want to claim the PRE on the property that has the largest capital gain. However, let’s consider a scenario in which two homes may be sold within a short period of time – a client is moving to a new location for work and they’re selling both their home and their nearby vacation home.

To keep the numbers simple, let’s assume each property has been owned for 10 years and has a $400,000 gain. One sale occurs in late 2024 and the second in early 2025.

A client claiming the PRE only on the first home would pay no taxes on that sale, while the second home would report a capital gain of $400,000. The first $250,000 would have an inclusion rate of 50 per cent while the remaining $150,000 of gain would be exposed to the new inclusion rate of 66 per cent.

A better solution would be to claim the PRE for five (or even six) years on the first home, then claim the remaining available PRE years on the second home. That would result in zero exposure to the two-thirds inclusion rate on either sale. Yes, the client will have brought forward some taxes payable on the sale of the first home that could have been avoided, which is a valid consideration. But with the second home being sold soon thereafter, the client will have reduced the taxes significantly on the sale of that property.

A client’s unique plans and circumstances matter here. These include the magnitude of gains on each property and the timeline for when they plan to sell the properties. However, it’s hard to deny that the strategic tax planning with the PRE has changed following the 2024 federal budget for those who have multiple personal-use properties.

Aaron Hector, CFP, R.F.P., TEP, is a private wealth advisor at CWB Wealth in Calgary.

For more from Globe Advisor, visit our homepage.

What’s the financial commitment of owning a cottage?

We want to hear from cottage owners, recent buyers, or potential buyers about the financial commitments of owning a second home. Are you a new Canadian embracing cottage culture? Did you purchase during the pandemic but are now facing financial challenges? Has remote work dynamics changed the game? Please share your experiences below, or reach out directly to Globe reporter Irene Galea at

The information from this form will only be used for journalistic purposes, though not all responses will necessarily be published. The Globe and Mail may contact you if someone would like to interview you for a story.

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe