Capital Gains Tax on Real Estate in Canada

How Much Is Capital Gains Tax in Canada?

Capital gains tax in Canada is roughly half your marginal tax rate, applied to the gain. Only 50% of a capital gain, the taxable capital gain, is added to your income; the other half is tax-free. At a 40% marginal rate you pay 20% of the gain, and at a 50% rate, 25%.

An example with 2026 rates: an Alberta resident with $100,000 of other taxable income makes a $20,000 gain. Half, $10,000, is added to income. It falls in the 20.5% federal bracket ($58,523 to $117,045) and the 10% Alberta bracket ($61,200 to $154,259), a combined 30.5%, so the tax is $3,050: 15.25% of the gain.

At the top of the scale, B.C. taxes income above $265,545 at a combined 53.5% in 2026 (33% federal plus 20.5% provincial), or 26.75% of a gain. Alberta's top combined rate, above $370,220, is 48%, or 24% of a gain.

A gain is taxed only when you sell, or are considered to have sold. The same rule applies to shares and funds: you report the gain on Schedule 3 and the taxable half on line 12700.

The Capital Gains Inclusion Rate

The capital gains inclusion rate is 50%. The 2024 federal budget proposed raising it to two-thirds on gains above $250,000 a year for individuals, and on all gains of corporations and most trusts. The start date was pushed from June 25, 2024 to January 1, 2026, and on March 21, 2025 the government cancelled the increase. It never became law: a property sold in 2026 is taxed at the 50% rate whether the gain is $50,000 or $500,000. Property held in a corporation follows other rules, not covered here.

How Capital Gains Are Calculated on a Rental Property

The gain is the sale price minus what the property cost and what it cost to sell:

1. Start with the sale price (the proceeds of disposition).
2. Subtract the adjusted cost base: the purchase price, plus buying costs such as land transfer tax and legal fees, plus capital improvements.
3. Subtract the outlays and expenses of the sale, such as commission and legal fees. The result is your capital gain.
4. Take 50% of it: the taxable capital gain.
5. Add any recapture of capital cost allowance (CCA) claimed on the building, which is 100% taxable, or deduct a terminal loss.

A rental property is land plus a building, so you split the price, the cost and the selling expenses between the two and report each on Schedule 3. When the agreement shows no split, the CRA's own example uses the municipal assessment.

What Is Adjusted Cost Base?

Your adjusted cost base (ACB) is what the property cost you for tax purposes: the purchase price, plus the costs of buying it, plus capital improvements. Land transfer tax and legal fees on the purchase cannot be deducted from rental income; the CRA says to add them to the cost. Paying $12,000 of land transfer tax raises your ACB by $12,000 and lowers the gain by the same amount.

Improvements count; repairs do not. A cost is capital when it gives a lasting benefit or improves the property beyond its original condition, such as replacing wooden steps with concrete ones. Repairing the same wooden steps is a current expense, deducted from rental income that year. Keep every invoice: an improvement you cannot document is hard to support if the CRA asks.

Can You Deduct Realtor Fees From Capital Gains?

Yes. Commissions and legal fees on the sale are outlays and expenses of the sale, subtracted from the sale price when you calculate the gain. So are fixing-up expenses, finders' fees, surveyor's fees, transfer taxes and advertising costs. They reduce the gain only, not your other income, and on a rental they also reduce the proceeds used to work out CCA recapture. Because only half the gain is taxed, $30,000 of commission saves $7,500 of tax at a 50% marginal rate. Estimate these costs with the realtor commission calculator and our guide to seller closing costs.

Capital Cost Allowance Recapture and Terminal Loss

Capital cost allowance is the depreciation you can deduct from rental income for the building, never the land. Most buildings bought after 1987 are in Class 1, at 4% a year of the undepreciated balance. CCA is optional, and it cannot create or increase a rental loss.

CCA defers tax rather than saving it. When you sell, the building's undepreciated capital cost (UCC: its cost minus the CCA claimed) is reduced by the lower of its net sale price and its original cost. A negative balance is recapture, taxed at 100%, not 50%. A positive balance with no property left in the class is a terminal loss, deductible in full; each rental property that cost $50,000 or more has its own class, so a sale normally empties it.

CCA does not reduce the ACB used for the capital gain. A loss on the building is never a capital loss, and if you own the land and the building sells for less than both its UCC and its original cost, a special rule can shift part of the price from land to building and shrink the terminal loss. Claiming CCA also cancels a 45(2) election and blocks a 45(3) election (see change in use below).

Worked Example: Selling a Rental Property

You bought a rental house for $450,000, paid $7,500 in land transfer tax and legal fees, spent $35,000 on a new roof and windows, and claimed $40,000 of CCA over the years. You sell for $800,000 and pay $38,000 in commission and legal fees.

The recapture line assumes the building made up $270,000 of the cost, including the improvements, and sold for at least that after its share of the selling costs. Its UCC was $230,000, so all $40,000 of CCA comes back. The 50% rate is only an illustration: $174,750 of extra income spans several brackets, so use your own rates. The capital gains tax calculator handles the capital gain (enter $450,000, $7,500, $35,000, $800,000 and $38,000); add the tax on the recapture yourself.

The Principal Residence Exemption: When a Home Sale Is Tax-Free

Selling your home is usually tax-free: if a property was solely your principal residence for every year you owned it, the whole gain is exempt. A house, cottage, condo or apartment qualifies for a year if you own it, if you, your current or former spouse or common-law partner, or your child lived in it at some point that year, and if you designate it.

One home per family per year. Since 1982, a family unit (you, your spouse or common-law partner, and your children under 18 who have no spouse or partner) can designate only one property for each year, so with a house and a cottage you choose one per year.

You must report the sale. Since the 2016 tax year, the exemption is allowed only if you report the sale and the designation on Schedule 3, and since 2017 on Form T2091(IND) as well. A late designation can cost $100 per complete month, up to $8,000, and an unreported real estate sale can be reassessed after the normal deadline.

The plus-one rule. The exempt part is the gain × (1 + years designated) ÷ years owned. The extra year covers the year you sell one home and buy another, provided you were resident in Canada in the year you bought.

Partial use. A home stays fully exempt when the income use is small (the CRA's example is a home daycare), with no structural change and no CCA. Otherwise you split the gain by square metres or rooms and report the income part. A loss on your home cannot be claimed.

When a Home Was Also a Rental: Change in Use

Turning your home into a rental, or a rental into your home, counts as selling it at fair market value and buying it back. Two elections in the Income Tax Act avoid or postpone the tax:

• Home to rental, subsection 45(2). Attach a signed letter to your return for the year of the change. There is no deemed sale, and while the property is rented you can keep designating it for up to four years if you designate no other home and stay a Canadian resident. You cannot claim CCA. The four years can be extended if an employer you are not related to relocates you or your spouse, your home is at least 40 km farther from the new workplace than your temporary home, and you move back while still with that employer (or by the end of the year after the job ends).
• Rental to home, subsection 45(3). This postpones the gain until you sell and lets you designate the property for up to four years before you move in. It is not available if you, your spouse or common-law partner, or a trust for either of you claimed CCA on the property after 1984. File it by the earlier of 90 days after the CRA asks and your filing due date for the year you sell.

Since March 19, 2019, both elections also cover a change in use of part of a property.

Example: you bought a condo in 2014, moved out and rented it in 2020 with a 45(2) election, claimed no CCA and designated no other home. You sell in 2026 at a $260,000 gain. Of 13 tax years owned you can designate 11: 2014 to 2020, when you lived there, and 2021 to 2024 under the election. The exempt share is (1 + 11) ÷ 13, or $240,000; the other $20,000 is a capital gain, $10,000 of it taxable.

The Residential Property Flipping Rule

Since January 1, 2023, the profit on a housing unit in Canada that you owned for less than 365 consecutive days is business income, not a capital gain. That includes rental properties and the right to buy a home, such as a pre-construction assignment. All of it is taxed, the principal residence exemption cannot apply, and a loss is deemed nil. The rule does not apply to property already held as inventory, or if you sold because of, or in anticipation of:

• the death of you or a related person
• a related person joining your household, or you joining theirs (a birth, moving in with a partner, caring for a parent)
• the breakdown of a marriage or common-law partnership, after living apart for at least 90 days before the sale
• a threat to the personal safety of you or a related person
• a serious disability or illness of you or a related person
• an eligible relocation for work or full-time post-secondary study, with the new home at least 40 km closer to the new work or school
• the involuntary loss of your job or your spouse's or common-law partner's job
• your insolvency
• the destruction or expropriation of the property

Holding a property for 365 days or more does not guarantee capital gains treatment: it still depends on the facts.

How to Reduce Capital Gains Tax on an Investment Property

Designate the years you lived there, plus up to four rental years under a 45(2) election.

Use capital losses. Capital losses in the same year, such as on shares, reduce your gains, and a net capital loss can be carried back three years or forward indefinitely. Losses on your home do not count.

Spread the gain with a reserve. If part of the price is paid to you in later years, for example when you take back a mortgage from the buyer, you can claim a capital gains reserve on Form T2017 and generally report the gain over up to five years. It is not available if you are not resident in Canada at the end of the year or during the next year, or if you sell to a corporation you control.

Time the sale. The gain is taxed in the year of the sale, so closing in January instead of December moves it a year, and a year with lower other income, such as after you retire, means a lower rate. A large gain can also trigger the alternative minimum tax: for 2025 returns, if the total in the CRA's test tops $177,882, you complete Form T691.

Keep records of improvements. Each documented improvement raises your ACB and cuts the gain.

What does not apply: the lifetime capital gains exemption. It covers only qualified small business corporation shares and qualified farm or fishing property, which can include farm or fishing land and buildings that meet the CRA's conditions. A rental house or condo is neither.

Non-Resident Sellers: Clearance Certificate and Withholding

If you live outside Canada and sell Canadian real estate, section 116 of the Income Tax Act applies. You notify the CRA before the sale or no later than 10 days after it, on Form T2062, plus Form T2062A for depreciable property such as a rental building. For the certificate of compliance, often called a clearance certificate, you pay or give security for 25% of the gain (the proceeds minus the ACB, before selling costs), plus tax on any recapture.

Without a certificate, the buyer becomes liable for 25% of the purchase price, or 50% for some property, including depreciable property such as a rental building, and can withhold that amount from the price. Late notice costs $25 a day, at least $100 and at most $2,500. You file a Canadian return by April 30 of the following year, and years you were not resident do not count toward the principal residence exemption.

Capital Gains Tax in B.C., Ontario and Other Provinces

There is no separate provincial capital gains tax: the taxable half of your gain is taxed at your province's income tax rates along with the federal ones.

B.C. adds a home flipping tax, in force since January 1, 2025, on the profit from residential property in B.C., including presale contracts, owned for less than 730 days. The rate is 20% if you owned it for 365 days or fewer, then falls steadily to zero at 730 days: about 10% at 18 months. It applies to sellers living anywhere, is separate from income tax and the federal rule, and has its own return, due within 90 days of the sale. A primary residence owned for at least 365 days gets a deduction of up to $20,000, and life-circumstance exemptions require filing the return.

Ontario taxes the gain through Ontario income tax, with no separate capital gains tax. What is specific to Ontario is the purchase side: the provincial land transfer tax, plus Toronto's municipal land transfer tax in Toronto, both of which you add to your ACB.

Questions to Ask Your Accountant Before Selling

Is every capital improvement documented? Bring the receipts and invoices.

Can any years be designated as my principal residence? This needs a year-by-year review.

How should the price be split between land and building? The split decides the recapture or terminal loss.

Does the closing date matter? Compare closing in December with January, and check whether a reserve or the alternative minimum tax applies.

Am I inside a flipping window? Check your dates against 365 days federally and 730 days in B.C.