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



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

Recourse Loan

A recourse loan is a type of loan where the lender can pursue the borrower’s personal assets, beyond the collateral, in the event of default.. more

Pari Passu

A pari passu clause is a contractual provision ensuring that multiple creditors share equally in repayment priority from the borrower’s assets.. more

Non-Recourse Loan

A non-recourse loan is a type of loan where the lender’s only remedy in case of default is to seize the collateral property; the borrower is not. more

Net Operating Income

Net operating income (NOI) is the total income generated by a property after operating expenses are deducted but before taxes and financing costs.. more

Mechanic's Lien

A mechanic’s lien is a legal claim by a contractor, subcontractor, or supplier for unpaid work or materials provided for a property.. more

Lis Pendens

Lis pendens is a legal notice filed in the land registry indicating that a property is subject to ongoing litigation that may affect its title.. more

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