Understanding Capital Gains Tax on Real Estate in Canada
When you sell a property in Canada for more than you paid, you’re potentially subject to capital gains tax. But how much do you actually owe? And are there exceptions? Let’s break it down in simple terms.
What is Capital Gains Tax?
A capital gain is the profit you make from selling an asset, like real estate. In Canada, 50% of your capital gains are taxable. That means only half of the profit you earn gets added to your income and taxed at your marginal rate.
The Principal Residence Exemption
Here’s some good news: If the property you’re selling was your principal residence for every year you owned it, you likely don’t have to pay any capital gains tax. To qualify:
- You (or your family) lived in the home regularly.
- You designate it as your principal residence when filing taxes.
Only one property per family unit can be claimed as a principal residence for a given year.
What About Rental or Investment Properties?
If you’re selling a rental property or a second home, capital gains tax applies. Here’s how it’s calculated:
- Selling Price – Adjusted Cost Base (ACB) = Capital Gain
- 50% of that gain is taxable income
Adjusted Cost Base includes:
- Purchase price
- Legal fees
- Renovations that improve value (not maintenance)
What About Changing Property Use?
If you convert your principal residence to a rental (or vice versa), the CRA considers it a “deemed disposition” — like you sold and rebought it at fair market value. This may trigger capital gains unless you file a special election to defer it.
Reporting Capital Gains
You must report all capital gains on your T1 General Tax Return in the year of sale. Use Schedule 3 and Form T2091 (if claiming principal residence exemption).
Final Tips
- Keep records of all purchase costs, legal fees, and renos.
- Talk to a tax professional before selling any investment property.
- Be cautious when flipping homes — CRA may treat profits as business income, not capital gains.
Conclusion
Understanding capital gains tax can save you from costly surprises when selling real estate in Canada. Whether you’re cashing in on an investment or downsizing your family home, knowing the rules helps you plan smarter — and keep more of your profit.
The information provided is for educational/entertainment purposes only. Actual information may vary, please consult our office for further details. Got a question? Feel free to reach our Helpdesk at (437) 286-2000 or helpdesk@assentt.com.
