Capital gains tax on real estate양도소득세

What is it?

When you sell a property for more than it cost you, the difference is a capital gain. Canada has no separate "capital gains tax": part of the gain is added to your income for the year and taxed as ordinary income tax (federal plus Ontario). People simply call this the capital gains tax (in Korean, 양도소득세 or just 양도세).

The share that is added to income (the inclusion rate) is written in section 38 of the Income Tax Act as "½". On a $100,000 gain, $50,000 becomes taxable income. Your tax rate depends on your total income for the year, so the actual tax differs from person to person.

The home you live in (your principal residence) is exempt. So the capital gains tax mostly comes up when you sell property you did not live in: an investment condo, a rental house, a cottage, an inherited home or land.

Step by step

1. Write down the proceeds of disposition, normally the sale price in the contract.
2. Work out the adjusted cost base (ACB): the purchase price plus the costs of buying plus the cost of work that added lasting value to the property (capital improvements).
3. Work out the outlays and expenses of selling: money spent "for the purpose of" the sale, such as the real estate commission and legal fees.
4. Capital gain = proceeds − ACB − selling costs (Income Tax Act s. 40(1)(a)).
5. Taxable capital gain = capital gain × ½ (s. 38(a)). This amount is added to your income on that year’s tax return.
6. If the property was your principal residence for some years, the formula in s. 40(2)(b) removes the gain for those years (see below).

What goes into the ACB and selling costs?

The Act defines the ACB only as the cost adjusted by the rules it sets out; which costs qualify follows CRA guidance and your accountant’s judgment. In general the purchase price, the land transfer tax and legal fees paid when buying, and major work that raised the home’s value (an addition, a finished basement, a new roof or windows) are included, while routine repairs and maintenance are not. Confirm the classification with an accountant.

Selling costs are described in the Act as outlays and expenses made for the purpose of the sale. The real estate commission (including HST) and legal fees are the usual examples.

Keep every receipt. On a home held for more than ten years, renovation receipts can cut the tax a lot. You report the gain on your income tax return for the year of the sale; check the CRA website for the form number and how to file.

Worked example

An investment condo bought in 2019 and sold in 2026 (the figures are made up to illustrate).

$67,500 is added to 2026 income and taxed at your own federal and Ontario rates. Because the rate depends on your total income for the year, work out the real tax with an accountant. This is an example for reference only.

A principal residence is exempt

The gain for the years the property was your principal residence is removed by the formula in s. 40(2)(b): A − (A × B/C) − D, where A is the gain, B is the number of years you designate it as your principal residence plus one (counting only years you were resident in Canada), and C is the number of years you owned it. The "plus one" means that if you sell one home and buy another in the same year, both homes can count that year.

To qualify as a principal residence under s. 54, you, your spouse, former spouse or child must have "ordinarily inhabited" the home in the year, you must designate it in the prescribed form on your tax return, and a family (you, your spouse and minor children) can designate only one property per year. Land of up to ½ hectare is included; more than that only if you prove it was necessary for your use of the home.

See "Principal residence exemption" for details. Changing a home from personal use to rental, or the reverse, can count for tax purposes as selling it at its fair market value at that time and buying it back right away (Income Tax Act s. 45(1)). An election under s. 45(2) or (3) can avoid this in some cases, so talk to an accountant before moving into an investment property or renting out your home.

Fully taxed: flipping and business income

Since January 1, 2023, profit on a home (including a pre-construction contract) sold after less than 365 days is treated as business income, not a capital gain: 100% is taxed and the principal residence exemption cannot be used (Income Tax Act s. 12(12) to (14)). The exceptions in the law, such as death, divorce or a job move, are in the "Residential property flipping rule" entry.

Even after 365 days, the CRA can treat the profit as business income if you bought intending to resell. Take extra care if you buy and sell repeatedly or assign pre-construction contracts.

If you lose money, or you are a non-resident

If you sell for less than your cost, you have a capital loss, and ½ of it is an "allowable capital loss" (s. 38(b)). Separate rules say which income it can offset and how, so check with an accountant or the CRA. A loss on a principal residence normally cannot be claimed.

If the seller is a non-resident of Canada for tax purposes, section 116 of the Income Tax Act applies. If the seller does not get a clearance certificate from the CRA, the buyer is liable to pay the CRA 25% of the price (50% for some property), with a few exceptions, and can hold that money back from the price. To get the certificate, the seller usually prepays 25% of the gain (proceeds minus ACB) or gives security the CRA accepts, and the actual tax is settled later on a Canadian tax return. See "Non-resident seller withholding (section 116)".

Things to watch

• The ½ inclusion rate is the text of s. 38 of the Income Tax Act as checked on October 30, 2026. The increase announced in 2024 is not in the current text of the Act. Tax law can change, so confirm the rules for the year of sale with an accountant before you sell.
• When you sell a rental property, separate rules may add back depreciation (CCA) you claimed in earlier years as income. Ask your accountant.
• Giving a property away or passing it on at death can count as a sale for tax purposes (a deemed disposition). Get advice before transferring a home to a child.
• Ontario income tax is calculated on the same taxable income as federal tax, so a capital gain affects both.

Example