Real Estate Taxes in Canada: Essential Tips for Property Sellers

In today’s economy, real estate is one of the best ways to generate wealth and fund your retirement. But while asset appreciation has been enormous, sellers should be asking themselves this very important question: How much tax do I pay when selling my property in Canada?

Real estate investors should know that the Canada Revenue Agency (CRA) continues to watch real estate transactions to curb tax non-compliance.

When putting your second home or income property on the market, taxes are inevitable – especially if you made a profit on the sale. However, there are a few strategies that can help you avoid capital gains tax in Canada when you sell your property.  As home prices continue to surge, here’s how to minimize how much of your profits go to the government — a fee known as capital gains tax.

What is Capital Gains Tax?

Capital gains tax can be charged from the sale of land, buildings, shares, bonds, and real estate investment trust units. Some examples of selling capital property include:

  • Exchanging one property for another
  • Settling or canceling a debt owed to you
  • Leaving Canada (emigration)
  • Your property is destroyed or stolen
  • Giving property as a gift

You may not have a “gain” with many of these scenarios, so you will not have to pay tax, but when you make more from the sale than the original purchase price, you must pay income taxes on the additional earnings.

In the case of property selling in Canada there are ways to minimize your tax bill, however, and you may even be exempt from paying tax altogether if the property you sold was your primary home.

Tax Implications of Selling Principal Residence in Canada

What makes the Canadian real estate market attractive is that you do not pay any taxes on the sale of your principal residence. As a Canadian resident, you will be given the principal residence exemption. Put simply, any profit you garner from selling your primary residence will not be taxed.

The CRA will allow the sale of your primary residence to be tax-exempt as long as it was your principal place of residence for every year that you owned it. To claim the exemption, you must report the sale on the following tax forms:

  • Schedule 3, Capital Gains or Losses
  • Form T2091 (IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust)

If you don’t report the sale on these forms, then whatever profit you made from the sale of your property could be subject to capital gains tax.

How to Calculate Capital Gains Tax on the Sale of Property in Canada

In Canada, you only pay tax on 50% of any capital gains you realize. This means that half of the profit you earn from selling an asset is taxed, and the other half is yours to keep tax-free.

To calculate your capital gain or loss, simply subtract your adjusted base cost (ABC) from your selling price. Divide that number in half (50%) and that amount will be taxed according to your income tax bracket, the province you live in, and your personal living situation.

Your “adjusted base cost” (ABC) is your purchase price: what you paid for the property plus other costs incurred in the purchase such as commissions, legal fees, and additions or improvements to the property.

Improvements are enhancements that increase the value of your property. For example, if you've renovated your kitchen or added a deck, those are improvements. They're investments you've made to make the property better.

On the other hand, repairs are simply fixes to keep things in working order. For instance, fixing a leaky roof or repairing a broken window are repairs. They're necessary maintenance tasks but don't add value to the property.

Here’s an example. Let’s say that years ago you paid $350,000 for a house in Ontario. At that time, you paid $8,000 in taxes and closing fees plus another $32,000 on additions and renovations to the property. In this case, you would add all those expenses together to arrive at an adjusted base cost of $390,000. See the breakdown below:

Original purchase price PLUS taxes and fees at the time of purchase PLUS additions &renovations EQUALS Adjusted Base Cost (ABC)
$350,000 $8,000 $32,000 $390,000

Now, let’s say you sold this home for $550,000. To calculate your taxable profit, you’d subtract your ABC from the price you sold it for. Then to determine the amount that will be taxed, just divide your capital gain in half:

Selling price LESS ABC Capital gain DIVIDED IN HALF equals taxable capital gain
$550,000 $390,000 $160,000 $80,000

Your taxable profit on the sale is $80,000, which would be added to the rest of your income and taxed accordingly by the CRA based on your personal circumstances. While the same rules apply to all gains and losses from real estate sales, the rate at which gains are taxed is ultimately based on the income tax bracket you fall into. The other half of your capital gains – also $80,000 – can be pocketed tax-free.

Can I Avoid Capital Gains Tax on the Sale of Rental Property in Canada?

Unfortunately, you can’t. You can only avoid capital gains tax on property that is your primary residence. All other property sales are subjected to capital gains tax.

Tax Strategies to Minimize Capital Gain Tax on a Sale of Property in Canada

1. Use capital losses to axe your capital gains

A capital loss occurs when you lose money because your home (or other asset) decreases in value. As with capital gains, the loss is “realized” when you sell your home and “unrealized” if you continue to hold onto it. The CRA allows you to use your capital losses to offset your capital gains down to zero.

CRA rules allow you to offset your capital gains tax by the amount of your capital losses, which can be very useful when trying to lower your tax bill.

Even more conveniently, if you don’t have any capital gains to offset in the same year that you earned a capital loss, you have 2 options:

  • Apply your capital losses to any capital gains you earned in the past 3 years and amend your prior tax bill(s).
  • Carry forward your capital losses to reduce capital gains in the future. Conditions apply, so see a tax and accounting professional

For example, let’s say you sold an asset and earned a capital gain of $30,000. Ordinarily, you’d take 50% of this amount – $15,000 – and declare that as your taxable income.

But say you sold another asset that same year and experienced a capital loss of $12,000. You can subtract $12,000 from $30,000 (to get $18,000) and cut the resulting amount in half, declaring this as your taxable income instead. Half of $18,000 is only $9,000, which means your income would be $6,000 less than if you had not experienced a capital loss – and less income means less taxes to pay.

Keep track of your assets, and consider selling off any that have declined in value. Doing so could provide a double benefit: you could improve your financial portfolio and decrease your tax bill at the same time.

2. Make use of the capital gains reserve

You can claim a reserve if you receive the full payment for your property over a number of years rather than getting the full amount right away.

A reserve will usually allow you to report just a portion of the full capital gain every year rather than the full amount.

Some situations in which you cannot claim a reserve are:

  • If you were not a resident of Canada or were otherwise exempt from paying taxes at the end of the tax year or at any time in the following year
  • You sold the property to a corporation that you control in any way

3. Time the sale of your property for when your income is the lowest

Because the amount of capital gains tax charged is based on your income tax bracket (among other things) it’s smartest to time the sale of property for when your earnings are at their lowest so that your tax rate is lower. This could be if you or your spouse go on maternity leave or if you take a leave of absence from work, for example. The goal of this strategy is to sell your property in a year when your overall income is low to avoid paying higher taxes on the asset.

4. Make a gift or inherited property your principal residence

If you inherit a home or are gifted property, consider making it your official principal residence, moving in for a year, before selling.

If the property was the primary residence of the person passing it to you, and it becomes your primary residence, then the estate will not owe capital gains tax when you take possession, and you can sell the property without owing high taxes on the profits.

5. Hold your future investments in tax-advantaged accounts

If you put the earnings from the sale into a tax shelter, you can then reduce your overall taxable income, which will make your tax bill lower. This strategy should only be used after talking to a tax professional accountant. Canadian financial institutions offer several tax-advantaged accounts in which you can hold investments.

With a Tax-Free Savings Account (TFSA), you don’t have to declare any gains you earn and can make tax-free withdrawals as well. There is a contribution limit that places a ceiling on the amount you can contribute to your TFSA each year, but the good news is that unused contributions roll over to future years. So, you won’t lose any opportunity to grow your money if you fail to use up your contribution room in a given year.

Another popular option is to hold your investments in a registered account like a Registered Retirement Savings Plan (RRSP). Such accounts often come with features such as tax-free contributions or withdrawals and the ability to treat your contributions as tax deductible. RRSPs, in particular, allow for tax-deductible contributions and tax-free growth as long as funds stay within the plan. The account is tax-deferred, so you only pay income tax when you withdraw money upon retirement when you withdraw.

6. Donate your property to causes you care about

If you have assets, such as property or corporate stocks, you can donate them to charity and use the donation to lower your capital gains tax. And if you donate assets that have grown in value since you first acquired them, you won’t be subject to capital gains tax on those assets.

So, if you just sold a $380,000 property that you originally bought for $295,000, you would normally have to count that $85,000 increase in property value as a capital gain. But if you donate the property to charity, you can avoid this and take home a large tax deduction instead.

On the other hand, if a property has lost some of its value but you still pass it on to keep it in the family, you can count the capital loss against your other income earnings.

7. Incorporate your rental property business

If you incorporate your rental property business, you transfer the ownership of the property to the corporation, which then makes the corporation the legal owner.

When the property is sold, the capital gain will be taxed at a corporate tax rate, which is usually much lower than the personal tax rate, saving you money on your tax bill.

Are any Property Expenses Tax Deductible? Can any Expenses Offset Capital Gains Tax in Canada?

There are tax advantages related to some expenses involved with renting, selling, and moving away from your home.

  • Moving expenses (students and business owners). If you’re relocating to be 40+ km closer to school or work, you can claim a host of moving expenses like transportation, storage, temporary living expenses, the cost of maintaining your old home before it’s sold (max $5,000), and driver’s license replacement fees.
  • Rental home expenses. You can deduct any reasonable cost associated with earning rental income including rental property insurance premiums, legal fees, accounting fees, property management fees, and the cost of materials and third-party labor for minor repairs (capital depreciation is claimed as capital cost allowance).
  • Real estate expenses. Although real estate commissions on the sale of your home are NOT tax-deductible, you can reduce the amount from the sale price of your home to calculate capital gains. This can reduce the overall capital gains tax you pay. Legal fees, land transfer taxes, and advertising costs can similarly be used to reduce your capital gains tax.

Are There Specific Exemptions for Certain Types of Property from Capital Gain Tax?

Yes. As mentioned above, your primary place of residence can be exempted from capital gains tax. If you own a farm or fishing property and sell either of these for a profit, the amount you profited is exempt from capital gains tax up to a lifetime limit of $1,000,000. This deduction is claimed on line 154 of your tax return.

Farm or fishing “property” that qualifies for exemption includes:

  • Shares of the capital stock of a family farm or fishing corporation owned by you, your spouse, or your common-law partner.
  • An interest in a family farm or fishing partnership owned by you, your spouse, or your common-law partner.
  • Real property including land, buildings, and fishing vessels.
  • Property included in capital cost allowance Class 14.1, such as milk and egg quotas, or fishing licenses.

Non-Canadian Resident Owners

The tax implications are slightly different for non-Canadian resident owners or individuals who are  Canadian citizens but do not reside in the country. There are several aspects that non-resident owners must be aware of when selling a property:

  • Apply for a clearance certificate.
  • A non-resident withholding tax of 25 percent of the home’s gross sales price (50 percent if it is a rental property).
  • File a Section 216 return to confirm that they have reported rental income and paid taxes (this is if the property has been rented out).
  • Submit a Canadian tax return for the year of the sale.

Make Tax Preparation Simple by Filing Taxes

Knowing more about the intricacies of capital gains tax could line up your sale to maximize the profits you make on your home or investment property – and save a big headache at tax time.

Investing in property is worth it when you know what to look for and how to finance your real estate vision.

Filing Taxes professional accountants can help Canadian property owners effectively manage their finances, stay organized, and potentially reduce capital gains tax liability at the end of the tax year.  Feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step toward proper management of your finances.

FAQs About Capital Gains Tax On Property

Please read on to find out more about capital gains and losses incurred from selling property, real estate, and other depreciable property in Canada.

Do you have to tell CRA that you sold your house?

Yes, you have to report it, even if you sell the home at a loss or if it is your principal residence. You will not have to pay capital gains tax unless it is an investment property and you make a profit on the sale. If you do not report the sale, it could be considered tax evasion.

Can you defer capital gains tax on real estate in Canada?

Yes, if the property was your principal residence the entire time you owned it, you do not have to pay tax on your gain.

You can also use past capital losses to offset your gains from a property sale or, in some cases, do what is known as a “rollover”, in which you transfer the property to another person, trust, or corporation.

Can you sell a rental property and not pay capital gains in Canada?

You may be able to by taking advantage of legal exemptions. You can make it your principal residence before selling, you can incorporate your rental property business, move your earnings to a tax shelter, or you can try carrying forward your losses from previous years to offset capital gains.

It is always a good idea to consult a tax professional before using strategies such as these to ensure your actions remain legal.

Is gifted property taxable in Canada?

Yes. In Canada, gifted property is considered as having been sold at the fair market value, so if you want to “sell” a house to your son for $1, it will still be taxable at the full market value that year.

If you inherit a deceased person’s primary home, the transfer to you will be tax-free. To be able to sell the home and avoid capital gains tax, you could make it your primary residence first.

Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.

Written By:
Salman Rundhawa
Salman Rundhawa is the founder of Filing Taxes. Salman provides valuable tax planning, accounting, and income tax preparation services in Toronto, Mississauga, Oakville, and Hamilton.

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