The Taxes on Selling a Home in Canada

By Emily Southey | 16 minute read

You might think that selling a property is all about the money you’ll gain from the sale. But the reality is expenses come with selling a home. One type of expense you may have to budget for is taxes. There are many taxes relating to home sales in Canada. Though some likely won’t apply to you, it’s important to be aware of them. From capital gains tax and non-resident taxes to the recently proposed residential property-flipping tax, we dive into all there is to know about Canadian home sales taxes below. 

–

Capital Gains Tax

Many Canadians wonder if their home sales are subject to capital gains tax. We’re here to set the record straight. Capital gains tax only applies to investment properties, not principal residences. Therefore, if the home you’re selling is your principal residence, the sale will not be subject to capital gains, but if you’re selling a second home or investment property, it will be. Keep reading to learn more about capital gains tax, including how it’s calculated and tips for reducing how much capital gains tax you pay.

–

What is a principal residence?

According to the Canada Revenue Agency (CRA), a property qualifies as a principal residence if it meets the following four criteria:

 –

• It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation;
• You own the property alone or jointly with another person;
• You, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year;
• You designate the property as your principal residence.

 –

Please note that your property must meet ALL four of the conditions listed above. Further, the CRA states that a principal residence can be any of the following types of homes: house, cottage, condominium, apartment, duplex, trailer, mobile home, or houseboat.

–

What is capital gains tax?

Capital gains tax is a type of tax you pay to the Canadian government when you make a profit from selling something of value. This could be a property (with the exception of a principal residence), a stock, a bond, or any other asset. Capital gains tax only applies if you earn more from the sale than you paid originally. For example, if you purchased an investment property for $400,000 and then sold it for $550,000 two years later, your capital gains are $150,000 (the difference between the purchase price and the sale price). You are then legally required to report this amount, along with your other income, on your income tax return.

–

Are there exemptions to paying capital gains tax on a home sale?

Yes, there are several exemptions to capital gains tax. Therefore, you shouldn’t just assume that because you’re selling a home, you’ll have to pay this tax. The principal residence exemption is the more important exemption to capital gains tax in Canada that sellers need to be aware of. Primary places of residence are tax-exempt according to the CRA. To ensure your residence qualifies as a principal residence, refer to the information above. Keep in mind that even if the home you sold was your principal residence, you are still required to report the sale on Form T2091 (IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust) and Schedule 3, Capital Gains or Losses. Failure to report a home sale, even a principal residence home sale, could lead to the CRA subjecting the sale of your property to capital gains tax.

 –

The other exemption to paying capital gains tax on home sales relates to farm and fishing properties. If you own a farm or fishing property and sell either for profit, the amount you earned on the sale is exempt from capital gains tax up to a lifetime limit of $1,000,000. This deduction can be claimed on line 154 of your income tax return. To take advantage of this tax exemption, your farm or fishing property must meet the following conditions:

– 

• 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; and
• Property included in capital cost allowance Class 14.1, such as milk and egg quotas or fishing licences.

–

What properties are not exempt from capital gains tax?

Now that you know principal residences, along with farms and fishing properties, are exempt from capital gains tax in Canada, it’s time to consider which properties are not exempt from this hefty tax burden. According to the CRA, real estate assets subject to capital gains tax in Canada include any buildings, land, and homes, whether used for business or residential purposes, so long as they are not designated as a principal residence. Examples of properties subject to capital gains tax include cottages (if you have a principal residence elsewhere in the province) and investment properties purchased to generate rental income.

How to calculate capital gains tax on your home sale

In Canada, capital gains tax is the tax individuals pay when selling an asset or capital property, such as a secondary residence. Capital gains are the profits from that sale.  Effective June 25, 2024, If the capital gain is more than $250,000 in a year, then you would be expected to pay tax on 67% of that gain; otherwise individuals will continue to only pay tax on 50% of any capital gains up to $250,000 per year.half of the money you make from the sale is taxed, while the other half is yours to enjoy tax-free. To calculate the capital gains tax on a home sale, subtract the adjusted base cost (ABC) of the home from the selling price. Divide that number in half, if less than $250,000 in capital gains, and the amount you’re left with is the amount subject to capital gains tax in Canada. The capital gains taxes owed will vary depending on several factors, like your income bracket, the profit realized, and the province or territory you reside in. Please note that the adjusted base cost is the original purchase price of the home, including legal fees, taxes, commissions, and any additions or improvements made to the property. Therefore, to calculate your adjusted base cost, you would add the original purchase price of the home, plus the cost of legal fees, commissions paid, and renovations made. For example, if the purchase price was $500,000, and then you paid another $10,000 in taxes, $2,000 in legal fees, $15,000 in commissions, and $30,000 on renovations, your adjusted base cost would be $557,000. This is the number you would deduct from the selling price. 

–

Tips for reducing how much capital gains tax you pay on your property sale

If you plan on selling a property and you know will not be exempt from capital gains tax, there are a few tips and tricks you can employ to minimize how much capital gains tax you pay. Keep reading for our top strategies on how to reduce the amount of capital gains tax you owe or possibly eliminate it altogether. 

–

Leverage capital losses

The CRA allows taxpayers to use their capital losses to offset capital gains. Therefore, if you recently suffered a capital loss (you lost money because your home, or another asset, depreciated in value and sold for less than you originally bought it for), you can use this to your advantage. Just like with a capital gain, a capital loss is only realized once the property is sold. If you decide against selling the home, the capital loss is unrealized. The capital loss must be realized if you want to use it to offset a capital gain. Even better, if you don’t have any capital gains to offset in the same year you suffered a capital loss, you have the option of applying your capital losses to any capital gains made in the past three years. To use this method, you would need to amend your prior tax bills. Alternatively, you also have the option of carrying forward your capital losses to reduce future capital gains.

–

Sell your property when your income is the lowest

Timing is everything, especially when it comes to real estate and capital gains tax. Since the amount of capital gains tax charged is partially dependent on your tax bracket, it could be beneficial to hold off on selling your property until your income is at its lowest. This way, your capital gains tax rate will be lower, saving you money. Examples of when your income might be lower are if you or your partner are on parental leave after having a baby or you take a sabbatical or other leave of absence from work. Whatever the reason, selling your property during a year where your income is lower than normal could reduce how much capital gains tax you owe.

–

Hold investments in tax-advantaged accounts

There is a wide range of tax-advantaged accounts available to Canadians, and holding investments in these accounts can have many benefits. For example, if you hold an investment in a Tax-Free Savings Account (TFSA), you are not required to declare or pay tax on any gains you earn from this investment. Though there is a contribution limit to many of these accounts, including TFSAs, unused contributions roll over annually. Another type of account that may be advantageous to investors is the Registered Retirement Savings Plan (RRSP). While not quite as beneficial as a TFSA, RRSPs typically come with features like tax-free contributions and withdrawals, as well as tax-deductible contributions and tax-free growth. By holding investments in a tax-advantaged account such as a TFSA or RRSP, you may be able to reduce or at the very least defer the capital gains tax owed on a home sale.

–

Donate your property to charity

One final — albeit rather extreme — tip for reducing how much capital gains tax you pay is to donate your property. If it’s feasible, donating your home to a registered charity of your choice can be used to lower your capital gains tax. Moreover, if the property donated has appreciated in value and you sell it for more than what you originally paid (a capital gain), you won’t be subject to any capital gains tax. Instead, you get to benefit from a large tax deduction. 

Non-Resident Taxes

Non-residents of Canada may be subject to taxes that residents are not. To determine whether you are a non-resident, consider the following definition of a non-resident according to the Canada Revenue Agency (CRA). A non-resident is someone who:

 –

• normally, customarily, or routinely lives in another country and is not considered a resident of Canada; or
• does not have significant residential ties in Canada; and
• lives outside Canada throughout the tax year; or
• stays in Canada for less than 183 days in the tax year.

 –

While there are some exceptions to the rule, most non-residents who sell a property in Canada must pay tax on any income or gains earned from the sale of the property. This principle extends to all types of residents, whether you’re selling a condo, vacation property, land, or residential home. When the property is sold, the buyer is required to withhold a portion of the sale (usually 25% of the gross selling amount) and remit it back to the CRA. In lieu of this, a Certificate of Compliance for the sale of the property can be filed, and if approved by the CRA, could eliminate or reduce the withholding taxes. The main benefit of a Certificate of Compliance is, when filed, the 25% withholding tax is calculated based on the net profit of the property, rather than the gross sale. 

 –

Beyond the 25% withholding tax mentioned above, non-residents are also required to file a Canadian income tax return by April 30 following the year they sold their property. Typically, once your income tax return has been filed, a portion of the 25% withholding tax, originally remitted by the buyer, is returned to the seller. This is because the 25% withholding tax is a higher amount than the income tax owing. Filing an income tax return allows the non-resident seller to claim expenses associated with the property sale, such as legal fees and REALTOR® commissions.

–

Income Tax and Residential Property Flipping

–

People who engage in house flipping on a regular basis, whether residents of Canada or not, may be required to include this information on their income tax returns. If flipping homes is your primary job or forms a significant portion of your income, the CRA will likely consider it active income and you will be subject to the same tax rates as any other occupation. 

 –

In fact, in the 2022 budget recently released by the federal government of Canada, a new residential property-flipping rule was proposed. Entitled “Making Property Flippers Pay Their Fair Share,” this rule would make any profit from the sale of a residential property taxable as business income if the seller owns the property for less than a year. The proposed measure would apply to properties bought, flipped, and sold in under 12 months starting January 1, 2023. Certain exemptions would apply, such as death, disability, the birth of a child, a new job, or a divorce. This new legislation was proposed because it has been shown that flipping houses can lead to higher housing prices. Therefore, the purpose of the new residential property-flipping rule is to ensure the profits made from flipping properties are taxed fairly and in full.