The principal residence exemption shelters all or part of the capital gain realized on the disposition of a property that qualified as the taxpayer's principal residence. A property generally qualifies for a year if it was ordinarily inhabited in that year by the taxpayer, a spouse or common-law partner, a former spouse, or a child, and is designated as the principal residence for the year.
A family unit may designate only one property as a principal residence for any given year, which affects households that own more than one residence, such as a city home and a cottage. Since 2016, the disposition of a principal residence must be reported on the personal return even when the full gain is exempt. The exemption interacts with the change-of-use rules, periods of rental use, and ownership through a trust, all of which can affect how much of the gain is sheltered.