Capital gains tax on real estate in Canada

In Canada, a capital gain on real estate is the profit you make when you sell a property for more than it cost you. Whether that gain is taxed comes down to one question: was the property your home, or was it something else? The home you actually live in is almost always sheltered by the principal residence exemptionAn exemption that makes the capital gain on the home you live in tax-free for every year it was designated your principal residence — limited to one property per family per year.. Everything else is taxable:

• Rental properties — a condo, house, or duplex you rent out.
• Second homes and cottages — only one property per family can be exempt each year.
• Investment or speculative property — including pre-construction assignments and flips (which the CRA may even tax as business income, not a capital gain).
• Inherited property you later sell for more than its value on the date you received it.
• Foreign property — a vacation home in the U.S. or abroad is taxable in Canada too.

When the gain is taxable, only 50% of it is included in your income — the 2026 inclusion rateThe share of a capital gain that gets added to your taxable income. In Canada it is 50% — so only half of every gain is taxed, and the other half is tax-free. — and that half is taxed at your normal marginal rate. There is no special real estate tax rate. The other half is tax-free.

The principal residence exemption is the single biggest break in Canadian real estate. For every year a property is designated as your principal residence, that year's share of the gain is tax-free. If a home was your principal residence for the entire time you owned it, the whole gain escapes tax.

The exemption is prorated using this formula:

• Exempt gain = total gain × (1 + years designated) ÷ years owned.
• The "plus one" year means you get one extra year of exemption — handy when you buy a new home and sell the old one in the same year.
• You can designate only one property per family per year as your principal residence.

That one-property limit is what makes a cottage or second home taxable. Each year of ownership, your family chooses which property to shelter. Many people compare how fast each property grew and designate the one with the larger per-year gain — sheltering the bigger number and paying tax on the smaller.

One catch that surprises people: even when the gain is fully exempt, you must still report the sale of your principal residence on Schedule 3 of your tax return to claim the exemption. Skip it and the CRA can deny the exemption or charge a penalty.

When you sell a property that isn't your principal residence, the full gain is taxable. The math is the same as any capital gain: take your proceeds of dispositionWhat you receive when you sell, net of selling costs like the real estate commission and legal fees. Subtract your cost base from this to get the gain. (sale price minus selling costs), subtract your adjusted cost baseWhat you paid for the property plus closing costs (land transfer tax, legal fees) and capital improvements. A higher cost base means a smaller taxable gain. (purchase price plus closing costs and capital improvements), and half the result is added to your income.

For a rental property, watch one extra wrinkle: if you claimed capital cost allowanceCCA is the tax deduction landlords claim each year for the depreciation of a rental building against their rental income. It lowers tax now but is added back when you sell. (depreciation) against your rental income over the years, selling can trigger recaptureWhen you sell, the depreciation (CCA) you deducted over the years is "recaptured" — added back to your income and taxed in full as ordinary income, not at the 50% capital-gains rate.. That recaptured depreciation is taxed as ordinary income — fully, not at the 50% rate — on top of the capital gain. This is why many landlords choose not to claim CCA in the first place.

Selling a cottage in retirement is one of the most common taxable-property situations. A cottage bought decades ago for $80,000 and worth $600,000 today carries a $520,000 gain, of which $260,000 is taxable. That can be a large bill in a single year, so retirees often plan the timing carefully — selling in a low-income year, spreading a transfer to children over time, or using the principal residence designation for the cottage's strongest growth years instead of the city home. A large one-time gain can also push you over the OAS clawback threshold, so the interaction is worth modelling before you sell.

A change of useConverting a property from personal use to income-producing (or vice versa). The CRA treats it as a sale at fair market value, which can trigger a capital gain even though nothing was sold. happens when you convert a property from personal use to income-producing, or the other way around — moving out of your home and renting it out, or moving into a property that used to be a rental. The CRA treats this as a deemed dispositionWhen the CRA treats you as having sold an asset at fair market value even though no money changed hands — here, at the moment a property's use changes.: you're considered to have sold the property at its fair market value on the day the use changed, and a capital gain can arise even though no money changed hands.

Two elections can soften this:

• Subsection 45(2) lets you treat a property that became a rental as if it were still your principal residence for up to four more years — deferring the deemed disposition.
• Subsection 45(3) lets you defer the gain when a rental becomes your home, claiming the exemption for up to four prior years.

These elections are powerful but technical, with strict conditions and filing requirements. A change of use is one of the situations where a quick conversation with a tax professional pays for itself.

Getting the numbers right is where people save or lose the most money. The gain is:

• Net proceeds = sale price − selling costs (commission, legal fees, staging).
• Adjusted cost base = purchase price + closing costs (land transfer tax, legal fees) + capital improvements.
• Capital gain = net proceeds − adjusted cost base.

Capital improvements are the big lever. A new roof, a finished basement, an addition, or a kitchen renovation all add to your cost base and shrink the taxable gain. Routine repairs and maintenance — repainting, fixing a leak — do not count, because they keep the property in its existing condition rather than improving it. Keep every receipt: years later, those documents are what let you prove a higher cost base and pay less tax.

Several everyday moves keep the bill down on a taxable property:

• Claim every capital improvement. Renovations and additions raise your cost base. Find the receipts before you file.
• Deduct all selling costs. The real estate commission alone is often 4–5% of the sale price.
• Designate strategically. When you own two properties, designate the one with the larger per-year gain as your principal residence.
• Time the sale. Selling in a year when your income is low — early retirement, a gap year — taxes the gain at a lower marginal rate.
• Offset with capital losses. Losses from your stock and ETF portfolio can cancel a property gain dollar-for-dollar.
• Mind the OAS clawback. If you're over 65, model whether the gain pushes you past the OAS threshold before you sell.

For the full picture of how capital gains work across every asset — not just real estate — see our capital gains tax explained guide and the main capital gains calculator.

This guide and calculator are for educational purposes only and are not financial or tax advice. The calculator uses a simplified model: it adds your closing costs and improvements to the purchase price, subtracts selling costs from the sale price, applies the 50% inclusion rate, and taxes the taxable half at the flat marginal rate you enter. The principal residence option prorates the gain by the years you designate. It does not account for capital cost allowance recapture, the change-of-use elections, capital losses, provincial surtaxes, alternative minimum tax, or how a large gain can push you into a higher bracket or trigger the OAS clawback. Figures reflect 2026 rules. Confirm the current rules and your own situation with the CRA or a qualified tax professional before acting.