Capital gains tax on a house sale in Ontario: the short answer
Capital gains tax in Ontario is not automatically charged whenever a home is sold. Capital gains on a house sale may be fully sheltered when the property qualifies for the Principal Residence Exemption (PRE), while a rental, cottage, second home, investment property, or period not covered by the exemption can create a taxable gain. This property seller tax issue is governed primarily by federal income-tax rules, while the Ontario sale process determines how title, closing funds and the statement of adjustments are handled.
The gain is generally based on profit, not the full sale price. Before listing or accepting an offer, sellers should identify how the property was used, who owned it, whether it was rented or used for business, and whether they have documents supporting their purchase cost and improvements. A transactions lawyer can help address the Ontario closing side of the sale and identify facts that should be reviewed with the seller’s accountant.
These rules can matter even where a seller expects no tax. A principal-residence sale still has to be reported to the Canada Revenue Agency (CRA), and a missed designation can affect an exemption claim.
When a property sale creates a taxable capital gain
A property sale can create a taxable capital gain when the seller realizes a profit and the gain is not fully covered by the PRE. The relevant event is usually a disposition, such as a sale or certain transfers of ownership, rather than an increase in value while the property is still owned.
Common situations that may produce taxable capital gains on real estate include:
- a rental condominium or house;
- a cottage or other recreational property;
- a second home that was not designated as a principal residence for all available years;
- an investment property held to earn rent or appreciate in value; and
- a home that was partly used to earn income, depending on the facts and the tax treatment of that use.
Tax treatment depends on the actual facts, not the label given to the property. For example, a seller may have lived in a Toronto condominium before renting it out for several years. The sale may involve both a period that can be covered by a principal-residence designation and a period that cannot, rather than being entirely tax-free or entirely taxable.
Non-resident status raises a separate issue. A buyer may need to hold back funds unless the non-resident seller provides the appropriate CRA clearance documentation, so that issue should be raised with the lawyer and accountant well before closing. Read more about non-resident withholding tax on the sale of Canadian property.
The Principal Residence Exemption and reporting the sale
The Principal Residence Exemption can eliminate or reduce capital gains tax when a property is ordinarily inhabited by the owner or certain family members and is properly designated for eligible years. A seller must report the disposition to the CRA even when the PRE fully shelters the gain.
For most individuals, the sale is reported on Schedule 3 and the principal-residence designation is generally made using Form T2091(IND), with the income-tax return for the year of sale. The governing rules are in the Income Tax Act, not Ontario real estate legislation. Filing requirements and forms can change, so sellers should confirm the current CRA requirements when preparing the return.
Since 1982, only one property per family unit may generally be designated as a principal residence for a particular year. The family unit can include a spouse or common-law partner and unmarried children under 18, subject to the tax rules. Where a family owned both a city home and a cottage, it may be necessary to decide which property to designate for years in which both were owned.
A property need not have been designated for every ownership year to receive some relief. The PRE formula can provide a partial exemption, and the extra year in that formula may help when a seller bought a new principal residence before selling the old one. The designation decision is important because using a year on one property can reduce the exemption available on another.
Changing legal title within a family does not automatically determine who may claim the exemption or whether tax arises. For a practical overview of ownership changes, including beneficial ownership concerns, see cra principal residence exemption beneficial ownership not on title trust agreement. A transfer from a parent to a child can also trigger tax consequences even if no money changes hands, because transfers may be treated as occurring at fair market value unless a specific rule applies.
For example, a couple bought a Toronto home in 2012 and a cottage in 2019, then sold the cottage in 2026 for a gain. Their accountant may compare the result of allocating the eligible designation years to the cottage against preserving those years for a later home sale. There is no automatic rule that the cottage must be taxable in full.
How to calculate capital gains on real estate
A capital gain generally starts with the sale proceeds, less the adjusted cost base and the outlays and expenses of disposition. If the PRE applies for all or part of the ownership period, it can reduce the gain before the seller determines the taxable portion to include on the tax return.
The basic calculation is:
Proceeds of disposition − adjusted cost base − selling expenses = capital gain
Proceeds are usually the sale price, subject to any relevant adjustments. Adjusted cost base generally begins with the purchase price and can include qualifying acquisition costs and capital improvements. Selling expenses can include real estate commission, legal fees and other costs directly connected to the sale.
For example, assume a seller bought a rental townhouse for $600,000, paid $12,000 in qualifying purchase costs, completed $45,000 in documented capital improvements, and later sold it for $850,000. If the seller paid $42,000 in commission and $3,000 in sale-related legal costs, the preliminary gain would be $148,000: $850,000 minus $657,000 in adjusted cost base, minus $45,000 in selling expenses. That example does not determine the seller’s final income-tax bill, which depends on matters such as the inclusion rate, the seller’s income and any available exemption.
Which costs can reduce the gain
Capital improvements can increase adjusted cost base when they create an enduring improvement to the property, while ordinary repairs and maintenance generally do not. Replacing a worn roof, adding a permanent deck, renovating a kitchen, or installing new windows may be capital in nature depending on the work and circumstances; painting, routine cleaning and fixing a minor leak are commonly maintenance expenses.
Sellers should preserve records rather than trying to reconstruct them after an offer is accepted. Useful records include:
- the agreement of purchase and sale from the original purchase;
- the original lawyer’s reporting letter and statement of adjustments;
- land transfer tax, legal-fee and other closing records;
- invoices, contracts, permits, cancelled cheques and payment records for capital work;
- the listing agreement, commission invoice and sale-related legal invoices; and
- records of rental use, business use, changes in use and periods of occupancy.
Keep the relevant sale documents too, including legal fees. A receipt alone does not settle whether an expense is capital or current, but it gives an accountant the information needed to assess it.
What capital gains tax rate applies in Ontario?
Canada does not apply a flat 20%, 24% or 30% tax rate to every house sale. The taxable portion of a capital gain is included in the seller’s income, and the final tax depends on the seller’s combined federal and Ontario marginal tax rates, other income, deductions and applicable tax rules for the year.
For an individual, the current general rule is that one-half of a capital gain is included in income. A seller asking how much tax they pay when they sell a house in Canada therefore needs more than the amount of the gain to obtain a meaningful estimate. An accountant can model the seller’s personal return, while a lawyer can help ensure the transaction facts and closing records are accurately preserved.
For example, a $100,000 gain on a taxable property does not ordinarily mean $100,000 is taxed at a single property-tax rate. Under the general one-half inclusion rule, $50,000 would be added to the individual’s taxable income before their personal federal and Ontario tax rates are applied. This is an illustration of the calculation structure, not a quote of the tax payable by any seller.
Rental use, business use, and a change in use
Converting a home to or from a rental property, or using part of it exclusively to earn income, can affect the PRE and may trigger a deemed disposition for tax purposes. A deemed disposition means the Income Tax Act can treat a change in use as if the property had been disposed of at fair market value, even though it was not sold to a third party.
Limited rental or business use does not always produce the same result as a full conversion. The extent of the income-producing use, whether capital cost allowance was claimed, and whether the use was ancillary to living in the home can matter. Do not assume that a home office or a basement tenant automatically eliminates the entire exemption.
A subsection 45(2) election may be relevant when a principal residence is converted to income-producing use. It is a technical election with conditions, timing and consequences that should be reviewed with an accountant and real estate lawyer before a return is filed or a property is listed. Owners considering an investment purchase or sale can also review issues specific to Toronto investment real estate.
Selling within 365 days
A residential property sold within 365 days of acquisition can be treated as business income under the federal Residential Flipped Property Rule rather than as a capital gain, subject to statutory exceptions. Business-income treatment can prevent the seller from relying on the PRE and can produce a different tax result from the usual capital-gain analysis.
The exceptions are fact-specific, so a short holding period should be discussed before the sale closes. Learn more about sales within 365 days of purchase.
Other seller taxes and costs to keep separate
Ontario land transfer tax is generally a buyer’s closing cost, not a seller’s capital-gains tax. A seller may still have mortgage payout costs, commission, legal fees, adjustments for property taxes or utilities, and tax consequences that affect the net proceeds.
An ordinary resale of a used residential home is generally treated differently from GST/HST charged on taxable services such as real estate commission and legal work. New homes, substantial renovations, assignments, builder sales and properties used in a business can create GST/HST questions that require a fact-specific review.
The statement of adjustments helps show the closing debits and credits between buyer and seller, but it is not a personal income-tax calculation. Sellers in York Region who need help with the Ontario sale process may work with our real estate lawyers king city team on title and closing documentation.
What your real estate lawyer checks before closing
A real estate lawyer helps complete the Ontario sale and flags transaction facts that may require income-tax advice; the lawyer does not calculate the seller’s final personal income-tax bill. Early disclosure is particularly important where the seller is a non-resident, the property was rented, part was used for business, the sale is an assignment, or ownership has changed.
Before closing, the lawyer’s work commonly includes reviewing title and the sale agreement, obtaining mortgage payout information, preparing or reviewing the statement of adjustments, arranging electronic registration, and receiving and disbursing sale proceeds. The seller should give the lawyer relevant ownership and residency information promptly, along with any documents required for closing.
After closing, retain the reporting letter, final statement of adjustments, sale agreement, commission invoice and records supporting the adjusted cost base. The seller generally reports the income-tax result through their return for the year of sale, with the accountant determining the appropriate reporting and available claims.
Frequently asked questions about capital gains on property sales
What is unrealised capital gains tax?
Unrealised gain is an increase in a property’s value while the owner still holds it. A typical arm’s-length sale is the event that realizes the gain for tax purposes, although certain changes in use or transfers can be deemed dispositions under the Income Tax Act.
Can I legally avoid paying capital gains tax on a property sale?
A seller can legitimately reduce or eliminate tax only where the tax rules support it, such as a valid PRE claim, accurate adjusted-cost-base records and properly documented selling expenses. Artificial arrangements, incomplete reporting or unsupported expenses can create reassessment and penalty risk.
How much tax is payable on a $100,000 gain?
The answer depends on whether any PRE applies and, if the gain is taxable, the seller’s income and tax situation. Under the general individual inclusion rule, one-half of a $100,000 taxable gain is included in income, but that does not establish the final amount payable.
Is the rate 20%, 24%, or 30%?
No single percentage answers the question for Ontario real estate. The taxable portion is added to income and taxed through the seller’s personal federal and Ontario tax calculation, so an accountant should provide a personal estimate before a seller relies on any projected net proceeds.
Speak with a Toronto real estate lawyer
Early legal review can help a property seller identify title, closing and documentation issues that may affect the sale and the information needed for tax reporting.
Call 416-321-8766 or request a quote to discuss your matter with Zinati Kay.