How Much Is the Capital Gains Tax on Real Estate in Canada?
When you sell real estate in Canada for more than you paid, the profit may be subject to capital gains tax — unless the property qualifies for the principal residence exemption. Understanding how capital gains are calculated, what the current inclusion rates are, and which strategies can reduce your tax liability is essential for any property owner.
This guide covers everything you need to know about capital gains tax on Canadian real estate in 2026, including the updated inclusion rates, the principal residence exemption, and practical strategies to minimise your tax burden.
How Capital Gains Tax Works in Canada
Canada does not have a separate "capital gains tax." Instead, a portion of your capital gain is added to your regular income and taxed at your marginal rate. The portion that gets taxed is called the inclusion rate.
Current Inclusion Rates (Effective June 25, 2024)
Individuals — First $250,000
50% inclusion rate — Only half of the first $250,000 in annual capital gains is added to taxable income.
Individuals — Above $250,000
66.67% inclusion rate — Two-thirds of capital gains above $250,000 in a year is added to taxable income.
Corporations and Trusts
66.67% inclusion rate on all capital gains — no $250,000 threshold.
Important Disclaimer
Tax rules change. The inclusion rate increase to 66.67% (above $250,000 for individuals) was announced in the 2024 Federal Budget. Always verify current rates with the CRA or a qualified tax professional before making decisions. This guide is for informational purposes only and does not constitute tax advice.
How to Calculate Capital Gains on Real Estate
The capital gain on a property sale is not simply the difference between the purchase and sale price. Here is the formula:
Capital Gain = Proceeds of Sale − Adjusted Cost Base (ACB) − Selling Expenses
Proceeds of Sale
- The total amount you received for the property
Adjusted Cost Base (ACB)
- Original purchase price
- + Land transfer tax paid on purchase
- + Legal fees on purchase
- + Capital improvements (renos, additions)
Selling Expenses
- Real estate commission + HST
- Legal fees on sale
- Staging and pre-sale repairs
- Mortgage discharge penalties
Example: Selling an Investment Property
The $120,000 is added to your other income for the year and taxed at your marginal rate. At a marginal rate of ~43% (Ontario), the approximate tax would be ~$51,600.
The Principal Residence Exemption (PRE)
The principal residence exemption is one of the most valuable tax benefits in Canada. If your property qualifies, you can shelter part or all of your capital gain from tax.
Qualifies as Principal Residence
- The home you ordinarily live in
- A house, condo, cottage, mobile home, or houseboat
- Property up to 0.5 hectares (1.24 acres) of land
- One property per family unit per year
- Must be owned by you (or your spouse/trust)
Does NOT Qualify
- Investment or rental properties
- Properties purchased primarily for resale (flipping)
- Vacant land (unless a home is built on it)
- A second property designated as principal residence by another family member
- Non-resident-owned properties (limited eligibility)
The PRE Formula
Exempt Gain = Capital Gain x (1 + Years Designated) / Years Owned
The "+1" in the formula provides a one-year buffer. If you owned a home for 10 years and designated it as your principal residence for all 10 years, the exempt portion is: Gain x (1 + 10) / 10 = 110% — meaning the entire gain is exempt. This buffer is especially helpful when you buy a new home before selling your old one.
Strategies to Reduce Capital Gains Tax
While you cannot avoid capital gains tax entirely on investment properties, several legitimate strategies can significantly reduce your liability.
Maximise Your Adjusted Cost Base
Keep detailed records of all capital improvements — kitchen renovations, bathroom upgrades, new roof, finished basement, additions. These increase your ACB and reduce your taxable gain. Routine maintenance (painting, minor repairs) does not count.
Deduct All Eligible Selling Expenses
Real estate commissions (plus HST), legal fees, staging costs, and mortgage discharge penalties can all be deducted from your proceeds, reducing the capital gain.
Use the Principal Residence Exemption Strategically
If you own multiple properties, you can designate the one with the largest gain as your principal residence for years you lived in it. Work with a tax professional to optimise which property to designate for which years.
Time Your Sale Across Tax Years
If possible, structure the sale so the closing falls in a year when your other income is lower, which can reduce your marginal tax rate on the capital gain.
Offset Gains with Capital Losses
Capital losses from other investments (stocks, other properties) can offset capital gains. Unused losses can be carried back 3 years or forward indefinitely.
Consider an Instalment Sale
If the buyer pays in instalments over multiple years (vendor take-back mortgage), you may be able to spread the capital gain across those years, potentially keeping you in a lower tax bracket.
Common Scenarios
Selling Your Primary Home
If it has always been your principal residence, the entire capital gain is exempt under the PRE. You must report the sale on your tax return (Schedule 3) and designate the property as your principal residence using Form T2091.
Selling a Rental Property
The full capital gain is taxable at the applicable inclusion rate. You may also need to "recapture" any capital cost allowance (CCA) previously claimed, which is taxed as regular income (not at the reduced inclusion rate).
Selling a Cottage / Second Property
You can designate a cottage as your principal residence for some or all years of ownership — but only for years when you do not designate another property. This requires careful planning to maximise the exemption on the property with the larger gain.
Inheriting a Property
When someone passes away, there is a deemed disposition at fair market value. The deceased's estate may owe capital gains tax. If a spouse inherits, the transfer can often be deferred (spousal rollover). The inherited property's new ACB becomes the fair market value at the time of death.
Frequently Asked Questions
How much is the capital gains tax on real estate in Canada?
Canada does not have a separate capital gains tax rate. Instead, a portion of your capital gain (called the inclusion rate) is added to your regular income and taxed at your marginal tax rate. For individuals, the inclusion rate is 50% on the first $250,000 of capital gains in a year, and 66.67% on amounts above $250,000 (effective June 25, 2024). For corporations and trusts, the inclusion rate is 66.67% on all capital gains. For example, if you are an individual who sells an investment property for a $200,000 capital gain, $100,000 (50%) is added to your taxable income and taxed at your marginal rate.
Do I have to pay capital gains tax when I sell my home?
If the property is your principal residence, you are generally exempt from capital gains tax under Canada's Principal Residence Exemption (PRE). To qualify, the property must be your primary home — the place where you ordinarily live. You can only designate one property as your principal residence per year (per family unit). If you owned the home for the entire time you lived in it and it was always your principal residence, the entire gain is tax-free. If you used part of the property for rental income or business purposes, you may owe capital gains on the portion used for that purpose.
How do I calculate capital gains on an investment property?
Capital gain equals the proceeds of sale minus the adjusted cost base (ACB) and any selling expenses. The ACB includes the original purchase price plus certain capital improvements you made (renovations, additions — not routine maintenance), plus purchase costs (land transfer tax, legal fees). Selling expenses include real estate commissions, legal fees, and staging costs. For example: Sold for $800,000 - ACB of $500,000 - selling expenses of $40,000 = $260,000 capital gain. At a 50% inclusion rate on the first $250,000 and 66.67% on the remaining $10,000, approximately $131,667 is added to your taxable income.
What is the principal residence exemption formula?
The CRA uses this formula to calculate the exempt portion of a capital gain on a principal residence: Exempt Gain = Capital Gain x (1 + number of years designated as principal residence) / number of years owned. The '+1' in the formula provides a one-year buffer, which is helpful when you buy a new home before selling your old one. For example, if you owned a home for 10 years and designated it as your principal residence for all 10 years: Exempt Gain = Capital Gain x (1 + 10) / 10 = 110% — meaning the entire gain (and even slightly more) is exempt.
Are there ways to reduce capital gains tax on real estate in Canada?
Several legitimate strategies can reduce your capital gains tax: (1) Maximise your adjusted cost base by documenting all capital improvements (renovations, additions, not cosmetic repairs); (2) Deduct all eligible selling expenses (commissions, legal fees, staging); (3) Use the principal residence exemption strategically if you own multiple properties; (4) Consider timing the sale to spread gains across tax years; (5) If eligible, use the Lifetime Capital Gains Exemption (LCGE) for qualifying farm property; (6) Offset gains with capital losses from other investments; (7) Donate appreciated property to a registered charity for a tax receipt. Always consult a qualified tax professional for advice specific to your situation.
What happens if I convert my principal residence to a rental property?
When you change the use of your principal residence to an income-producing property (or vice versa), the CRA considers this a deemed disposition — meaning you are treated as if you sold and repurchased the property at fair market value on the date of conversion. However, you can elect under subsection 45(2) of the Income Tax Act to defer the deemed disposition and continue to designate the property as your principal residence for up to 4 additional years after the change of use, provided you do not claim capital cost allowance (CCA/depreciation) on the property. This election must be made in your tax return for the year of the change. Consult a tax professional to ensure you file correctly.
See also our guides on closing costs when selling, realtor fees in Ontario, and buying commercial real estate.