Capital Gains Tax on Real Estate in Canada: A Seller's Guide

When you sell real estate in Canada for more than you paid, half of the gain is added to your taxable income. The capital gains inclusion rate is one-half: the federal government cancelled the proposed increase to two-thirds in March 2025, and the CRA administers the one-half rate. Your home can be fully exempt through the principal residence exemption if you designate it properly. Rental and investment property is taxed on the gain, and properties held for less than 365 days may be taxed as business income instead. This article is general information, not tax advice.

How capital gains tax works on property

A capital gain is the difference between what you sell a property for and what it cost you, after selling costs. In tax terms:

Capital gain = proceeds of sale minus adjusted cost base minus outlays and expenses of selling

Proceeds are usually the sale price.
Adjusted cost base (ACB) is what you paid, plus purchase costs such as legal fees and property transfer tax, plus capital improvements like a new roof or an addition. Routine repairs and maintenance are not added.
Outlays and expenses include real estate commission and legal fees on the sale.

Only half of the capital gain, the taxable capital gain, is added to your income for the year and taxed at your marginal rate. A capital loss can be used to offset capital gains, but not regular income.

Illustrative example: an investor bought a rental condo for $500,000 and paid $12,000 in purchase costs, so the ACB is $512,000. They sell for $700,000 and pay $28,000 in commission and legal fees. The capital gain is $700,000 minus $512,000 minus $28,000, which is $160,000. Half of that, $80,000, is added to their income for the year.

Where the inclusion rate stands

The 2024 federal budget proposed raising the inclusion rate from one-half to two-thirds on gains above $250,000 a year for individuals, and on all gains for corporations and most trusts. The start date was later deferred to January 1, 2026. On March 21, 2025, the Prime Minister announced that the increase was cancelled, and the CRA reverted to administering the currently enacted one-half inclusion rate. The same announcement kept the higher Lifetime Capital Gains Exemption of $1,250,000 on qualified small business shares and farming and fishing property.

If you read articles from 2024 warning about the two-thirds rate, including our own older post on the 2024 federal budget, keep in mind that the change did not go ahead.

The principal residence exemption

The gain on your home can be fully exempt from tax if the home was your principal residence for every year you owned it. A few rules decide whether you get the full exemption:

You must report the sale. The CRA only allows the exemption if you report the sale and the designation on Schedule 3 of your tax return, along with Form T2091(IND). A late designation may be accepted in some cases, but a penalty can apply.
One principal residence per family unit per year. For years from 1982 on, you, your spouse or common-law partner and your unmarried children under 18 can designate only one home per year between you.
The "plus 1" rule. The exemption formula adds one year, so when you sell one home and buy another in the same year, both can be covered for that year.
Partial exemption. If the home was not your principal residence for some of the years you owned it, for example because you rented it out or designated a cottage for those years, part of the gain is taxable.

If you own a home and a cabin, or a home and a rental condo, the choice of which property to designate for which years can make a real difference. That is a conversation to have with your accountant before you sell, not after.

Rental and investment property

A rental property does not qualify for the principal residence exemption, so the full gain is reported and half of it is taxed. Two other items often surprise sellers:

Recapture of capital cost allowance. If you claimed depreciation (capital cost allowance) on the building over the years, the amount you claimed is generally added back to your income in full when you sell for more than the depreciated value. It is taxed as regular income, not as a capital gain.
Change in use. Turning your home into a rental, or moving into a rental you own, can trigger a deemed sale for tax purposes. There are elections that can defer this, but they have to be made correctly and on time.

Investors building a portfolio in Surrey or the Fraser Valley should keep clean records from day one: purchase documents, receipts for improvements, and every CCA claim. It makes the eventual sale far simpler. Our guide to real estate investing in BC covers more of the planning side.

Short holds: the federal flipping rule and BC's flipping tax

Since January 1, 2023, the federal residential property flipping rule treats the profit on a housing unit, or a right to acquire one such as a presale assignment, owned for less than 365 consecutive days as business income. That means the whole profit is taxable, not half, and the principal residence exemption is not available. There are exceptions for specific life events, such as a death, a related person joining your household, separation, illness, a new job or the destruction of the property.

BC adds its own tax on top. Since January 1, 2025, the BC home flipping tax applies to profit from selling a residential property in BC, including presale contracts, owned for less than 730 days. The rate is 20% of the taxable profit on a sale within 365 days, falling gradually to zero at 730 days. A deduction of up to $20,000 may be available for a primary residence owned for at least 365 days. If you might sell within two years, check both rules before you buy.

Holding property in a corporation

Some investors hold rental property in a holding company. A corporation also includes one-half of a capital gain in its income, and the non-taxable half can generally be paid out to shareholders tax-free through the capital dividend account. Rental income in a corporation is usually taxed as investment income, at a higher rate than active business income, with part of the tax refundable when dividends are paid.

A holding company can make sense for some investors and not for others. Moving a property you already own into a corporation can itself trigger tax and property transfer tax unless it is structured carefully. Get advice from an accountant and lawyer who work with real estate investors before you set one up.

Selling a business that owns real estate

If you sell the shares of a qualifying small business corporation, the Lifetime Capital Gains Exemption may shelter up to $1,250,000 of the gain. Whether a company qualifies depends on how its assets are used, and a company that holds passive real estate may not. If you are planning a sale, our business acquisition team works alongside your accountant and lawyer so the tax structure and the deal structure match.

Plan before you list

The time to think about capital gains is before you sign a listing agreement. Gather your purchase documents and improvement receipts, ask your accountant to estimate the tax, and decide on timing. When you are ready, a home valuation from our team gives you a realistic sale price to plug into those numbers.

This article is general information about Canadian and BC tax rules as published by the Government of Canada and the Province of British Columbia. It is not tax, legal or accounting advice. Rules change and every situation is different, so speak with a qualified professional before you act.

Frequently asked questions

What is the capital gains inclusion rate in Canada?

One-half. The proposed increase to two-thirds was cancelled in March 2025, and the CRA administers the one-half inclusion rate. Half of your capital gain is added to your income and taxed at your marginal rate.

Do I pay capital gains tax when I sell my home?

Not if the home was your principal residence for every year you owned it and you report the sale and designation on Schedule 3 and Form T2091(IND). If it was not your principal residence for some years, part of the gain can be taxable.

How is capital gains tax calculated on a rental property?

Subtract your adjusted cost base and selling costs from the sale price. Half of the result is taxable. Any capital cost allowance you claimed may also be added back to your income in full as recapture.

What if I sell a property within a year?

Under the federal flipping rule, profit on a housing unit owned for less than 365 days is generally taxed as business income, fully taxable, unless a life-event exception applies. BC's home flipping tax can also apply to sales within 730 days.

Should I hold rental property in a corporation?

It depends on your income, goals and existing holdings. Corporations also include half of a capital gain, but rental income is taxed as investment income. Get advice from an accountant before you set one up or move property into one.

Sources

Rates, thresholds and program rules in this article were checked against these official pages on October 9, 2026. Rules change, so confirm current details before you act.

Capital Gains Tax on Real Estate in Canada: What Sellers Should Know