Capital gains rules remain stable for 2025 — for now, in the sense that the general capital-gains inclusion-rate proposal did not change the principal residence exemption for an Ontario homeowner. As of March 2026, a gain on a properly designated principal residence may still be fully sheltered, but a sale must be reported and the result depends on the property’s use, ownership, designation years and supporting records.
Capital gains rules for Ontario real estate: the short answer
For most Ontario homeowners, the important question is not whether there was discussion of a different capital-gains inclusion rate, but whether the principal residence exemption applies to their particular sale. That exemption is separate from the general rule that determines how much of a capital gain is included in income.
A capital gain can arise when a property is sold for more than its adjusted cost base and selling costs. If the property was your principal residence for every year you owned it and it meets the applicable conditions, the principal residence exemption can generally eliminate the gain. A cottage, rental property, second home, property held through a corporation, or a home with income-producing use requires closer review.
As of March 2026, the general capital-gains inclusion rate is one-half of a capital gain, subject to the tax rules in force for the relevant year and the taxpayer’s circumstances. This is federal tax treatment; Ontario income tax is then calculated through the individual’s or entity’s tax return, not as a separate property-sale tax collected on closing.
For a fuller explanation of the calculation and common sale scenarios, see how does capital gains work in Ontario.
Has the principal residence exemption changed?
The principal residence exemption has not been replaced simply because capital-gains inclusion-rate changes have been proposed or discussed. Whether it is available depends on the Income Tax Act rules, the owner, the property’s use and the years the owner designates, rather than on calling the home a “primary residence” in ordinary conversation.
Generally, the property must be a housing unit that the owner ordinarily inhabited during the year. A family unit can generally designate only one property as its principal residence for a particular year, so owners of both a Toronto home and a cottage may have a designation decision to make when one is sold.
The sale of a principal residence must generally be reported to the Canada Revenue Agency (CRA), even where the exemption reduces the taxable gain to zero. The designation is made with the income-tax return for the year of sale. Missing the reporting step can create problems even when no tax would otherwise be payable.
Title arrangements also matter. For example, an adult child may be on title for financing, estate-planning or beneficial-ownership reasons while a parent has the beneficial interest. The facts and documents should be reviewed before anyone assumes who can make a designation; this discussion of cra principal residence exemption beneficial ownership trust agreement not on title explains why the title record alone may not answer the tax question.
How capital gains on a property sale are calculated
A capital gain is generally the sale proceeds minus the property’s adjusted cost base and reasonable costs of selling it. The amount included in taxable income then depends on the applicable inclusion rules and whether an exemption, such as the principal residence exemption, applies.
In plain language, the starting calculation is:
Sale price − selling costs − adjusted cost base = capital gain before any exemption.
- Sale price is usually the amount the buyer pays under the agreement of purchase and sale.
- Selling costs can include real estate commission, legal fees related to the sale and other reasonable sale expenses.
- Adjusted cost base commonly begins with the purchase price and may include certain acquisition costs and capital improvements. It is not simply the property’s municipal assessment or current market value.
For example, a buyer purchased a Toronto condominium for $650,000, paid eligible acquisition costs of $12,000, and later completed documented capital improvements of $38,000. If the condominium is sold for $900,000 with $45,000 of eligible selling costs, the preliminary gain is $155,000: $900,000 less $45,000, less an adjusted cost base of $700,000. If it was fully eligible as the owner’s designated principal residence, the exemption may eliminate that gain; if it was rented for some years, a portion may remain taxable.
An unrealised capital gain is an increase in value while you still own the property. In the ordinary case, it becomes relevant for income-tax purposes when there is a disposition, such as a sale, though certain changes in use and other transactions can have tax consequences without a conventional sale.
When the principal residence exemption may be full, partial, or unavailable
The exemption may be full when a qualifying owner designates the property for all relevant years, partial when not every year can be designated, and unavailable where the statutory requirements are not met. A tax adviser should review the facts before a return is filed whenever a property had rental, business or shared-ownership features.
A partial result can arise where an owner had two homes during the same years, moved into a former rental property, or later rented out a former home. The designation formula can reduce the gain for the years a property was a principal residence, but it does not automatically shelter all appreciation.
Using part of a home to earn income does not always produce the same result. A modest workspace with no capital cost allowance claim and no structural change may be treated differently from a separately rented basement apartment or a home principally used for a business. Renting a room, converting a basement into a self-contained unit, claiming depreciation, or moving out while tenants move in should be discussed with a qualified tax professional before listing or filing.
Consider an owner who bought a detached house for $800,000, lived there for four years, then rented the entire house for three years before selling it. The sale may involve a change-in-use analysis, possible elections and a principal-residence designation decision. The lawyer can ensure that the sale documents and closing funds are handled properly, but an accountant or tax lawyer should advise on the return and any election before the filing deadline.
What to keep before listing and after closing
Keep records from purchase through sale, because the CRA may need evidence of your adjusted cost base, selling costs, occupancy and property use. Do not rely on a bank balance, a listing history or a verbal recollection years later.
- Agreement of purchase and sale from your purchase, statement of adjustments and legal account.
- Invoices, contracts, permits and proof of payment for capital improvements, such as an addition, kitchen reconstruction or permanent landscaping.
- The sale agreement, statement of adjustments, commission invoices and legal account from the sale.
- A timeline showing when you lived in the property, rented any portion, used space for business, or changed its use.
- Prior income-tax returns, principal-residence designations, rental schedules and records of any capital cost allowance claimed.
- Documents explaining trust, nominee, joint-ownership or beneficial-ownership arrangements.
A real estate lawyer can preserve closing documents and identify facts that may need tax advice, but does not replace the professional preparing your income-tax return. Keep digital copies in a place that remains accessible after closing.
What your Ontario real estate lawyer checks before closing
Your Ontario real estate lawyer reviews title, requisitions, closing documents and the flow of closing funds, but must be told early about facts that can affect tax, withholding or the wording of the transaction. Tell the lawyer before closing if an owner is not resident in Canada for tax purposes, the property has been rented or used for business, title is held by a corporation or trust, or GST/HST may apply.
For example, a seller who is non-resident for Canadian tax purposes may face purchaser withholding obligations under section 116 of the Income Tax Act unless the appropriate CRA certificate process is addressed. This cannot safely be left until the day before closing, because the buyer’s lawyer needs clear instructions and may need to hold back funds.
Similarly, a builder, renovator, investor or seller of a substantially renovated home may need GST/HST advice. A resale of a used residential home is often treated differently from a new or substantially renovated residential property, and the contract should not casually state that tax is included or excluded without reviewing the facts.
If you are buying or selling, a closing lawyer in Toronto can review the transaction documents and identify questions that should be taken to your tax adviser before completion. Investors using corporations, co-ownership arrangements or repeated acquisitions should also consider speaking with a real estate investment lawyer before they sign.
Underused Housing Tax: check the relevant ownership year
Underused Housing Tax (UHT) obligations are specific to the ownership year, the legal owner and any available exemption. An owner should not assume that no tax payable means no return was required, or that an obligation in one year automatically applies in another.
The UHT is a federal annual tax regime that has particularly affected some non-Canadian owners and certain corporate, partnership and trust ownership structures. Rules and exemptions have changed, so owners should confirm the filing requirements and any missed prior-year returns with a qualified tax professional using current CRA guidance.
Before selling, tell your lawyer if the property was held by a corporation, partnership or trust, or if an owner was a non-resident. Those facts may affect the documents required for closing even where the UHT question itself belongs with a tax adviser.
FAQ about capital gains and Ontario home sales
What changes are expected in 2026?
Do not make a sale or filing decision based on an assumption that an announced tax proposal will become law. As of March 2026, owners should confirm the current capital-gains inclusion rules and CRA administrative guidance for the taxation year in question before filing, particularly where the gain is large, a corporation or trust owns the property, or a transaction spans more than one year.
Do I report a principal-residence sale?
Yes, the sale of a principal residence generally must be reported to the CRA, even if the principal residence exemption means no taxable capital gain remains. The required designation is normally made with the income-tax return for the year of sale.
What is an unrealised capital gain?
An unrealised capital gain is the increase in a property’s value before a transaction that realizes the gain. For instance, a home bought for $700,000 and now worth $950,000 has a potential $250,000 increase before accounting for costs, but the owner has not ordinarily realized that gain merely because market value rose.
When might GST/HST be relevant?
GST/HST may be relevant when a sale involves a new or substantially renovated home, a builder or commercial activity, vacant land in some circumstances, or a property that is not simply a used residential resale. Obtain tax advice before signing if the seller has renovated for resale, operated a business from the property, or is unsure whether the agreed price includes or excludes GST/HST.
Property owners outside Toronto who need transaction assistance can also work with our bowmanville lawyers on Ontario real estate closing matters.
Speak with a Toronto real estate lawyer
Early legal and tax review can help identify title, non-residency, rental-use and GST/HST issues before they disrupt an Ontario property sale or closing.
Call 416-321-8766 or request a quote to discuss your matter with Zinati Kay.