Capital Gains Tax

Explore how capital gains tax applies to real estate in Canada, how to calculate it, and when the principal residence exemption protects sellers.

Capital Gains Tax

May 22, 2025


What is Capital Gains Tax?

Capital gains tax is a federal tax on the profit earned from the sale of a property or investment that has increased in value, applied when the asset is sold for more than its adjusted cost base.

Why Capital Gains Tax Matters in Real Estate

In Canadian real estate, capital gains tax applies to properties that are not the seller’s primary residence—such as rental properties, cottages, or investment real estate. When a property is sold, 50% of the gain is added to the seller’s taxable income.

Key considerations include:
  • The principal residence exemption excludes most owner-occupied homes
  • Costs like legal fees and real estate commissions reduce the gain
  • Tax implications should be factored into investment strategy

Formula: Capital Gain = Sale Price - (Purchase Price + Expenses + Capital Improvements)

Capital gains can significantly affect net proceeds from a sale, especially for long-held properties that have appreciated substantially. Sellers should consult with tax professionals and retain accurate records to properly calculate gains.
Understanding how capital gains tax works helps investors make informed decisions, time their sales effectively, and plan for tax obligations at year-end.

Example of Capital Gains Tax

A seller buys a cottage for $250,000 and sells it for $450,000. After deducting $15,000 in improvements and $20,000 in selling costs, the taxable capital gain is $82,500 (50% of $165,000).

Key Takeaways

  • Applies to non-primary residence sales.
  • 50% of gain is taxable as income.
  • Principal residence exemption may apply.
  • Planning helps reduce tax impact.
  • Professional advice recommended.

Related Terms

Additional Terms

Public Realm Improvements

Public realm improvements are enhancements to public spaces such as sidewalks, parks, plazas, and streetscapes, often funded or contributed by. more

Mortgagee in Possession

A mortgagee in possession is a lender who takes control of a property after borrower default, but before foreclosure or power of sale. The lender. more

Lease Surrender Agreement

A lease surrender agreement is a negotiated contract between a landlord and tenant that ends a lease before its scheduled expiration. Terms may. more

Green Infrastructure

Green infrastructure refers to natural or engineered systems that manage stormwater, reduce heat, and improve sustainability in developments.. more

Escrow Holdback

An escrow holdback is a portion of funds withheld at closing and held in escrow until specific conditions are met, such as completion of repairs,. more

Underused Housing Tax

The Underused Housing Tax (UHT) is a federal annual 1% tax on the value of vacant or underused residential property owned by non-resident,. more

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