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Capital gain tax is what you pay when you sell property for more than it cost, and in Canada it applies to half of the gain. Your main home is usually exempt, but a rental, a cottage or a second property is not, and even the exempt sale has to be reported. Here’s a rental sale with the numbers filled in.
What happens when I sell a rental property?
Take a condo you rented out. You sell it for $480,000. You paid $350,000 for it, and selling costs came to $20,000. The gain is $480,000 minus $350,000 minus $20,000, which is $110,000. Half, $55,000, is your taxable capital gain, and it goes on Schedule 3.
The tax on it turns on what else you earned that year. Our capital gains tax calculator gives these extra amounts for that $110,000 gain, using employment income as the other income.
| Province and other income | Taxable half | Extra tax |
|---|---|---|
| Ontario, $50,000 | $55,000 | $15,840 |
| Ontario, $70,000 | $55,000 | $18,175 |
| Ontario, $120,000 | $55,000 | $24,248 |
| Alberta, $70,000 | $55,000 | $17,176 |
The Ontario figures climb by more than $8,000 between the first and last row, and nothing about the property changed. That’s the reason to think about timing if you can choose the year.
Is the sale of my home taxed under the principal residence exemption?
Usually not, but you can’t skip the paperwork. The CRA says that for 2016 and later years it only allows the principal residence exemption if you report the sale and designate the property on your return. You report it on Schedule 3 and complete Form T2091(IND). If you sold two homes in one year, each needs its own form.
Forgot to designate? Ask the CRA to amend the return for that year. According to the CRA’s page on principal residence and other real estate, it will accept a late designation in certain circumstances, but a penalty may apply. The page doesn’t give an amount, so we won’t guess one.
If you’d like to see what a sale nets before you plan, the home sale proceeds calculator handles the commission and the mortgage payout, though it won’t tell you whether tax applies.
What counts as a principal residence for the exemption?
The CRA lists a house, a cottage, a condominium, an apartment in an apartment building or a duplex, and a trailer, mobile home or houseboat. So a cottage can qualify, and so can a condo. It still has to pass four tests for each year you want to cover.
- It is a housing unit, a leasehold interest in one, or a share in a co-operative housing corporation that gives you the right to live there.
- You own it alone or with someone else.
- You, your spouse or common-law partner, or one of your children lived in it at some point during the year.
- You designate it as your principal residence.
Only one home per family can be designated for each year since 1982. If you own a house and a cottage, the same year can't go to both, so the exemption has to be shared out between them. The land under the home can count too, usually up to half a hectare (1.24 acres), and more if you can show you need it to use and enjoy the home.
What if a cottage or home was partly rented?
That’s where people get caught. Picture Marc in Muskoka, who rented his cottage for a few summers before selling. Two CRA rules bite here. First, every time you change the use of a property (say, from personal to rental), the CRA treats it as sold at fair market value on that date, and any gain from the deemed sale is reported in that year. Second, if only part of a home earned income, you split the selling price and the cost between the parts, and you report the gain on the rental or business part. The part you lived in doesn’t count toward the gain.
The CRA also notes there are exceptions for a small amount of rental use, so read its page before filing, and don’t assume either way. A loss on a home you lived in isn’t deductible. Our calculator doesn’t model any of this.
Rental income you earned along the way is a separate matter from the sale gain. Estimate it with the rental income tax calculator and keep the two numbers apart on your return.
What if I sell a property within a year of buying it?
Then the profit may not be a capital gain at all. The CRA says any gain on a housing unit in Canada, rentals included, that you owned for less than 365 consecutive days is deemed to be business income. The same goes for a right to acquire a housing unit. Business income is fully taxable and is reported on Form T2125 rather than Schedule 3. A loss on such a flipped property is deemed to be nil.
The rule has exceptions when the sale happens because of, or in anticipation of, certain life events. The CRA's list includes a death, a marriage or common-law breakdown, a threat to personal safety, a serious illness or disability, an eligible job or school relocation, the involuntary end of a job, insolvency, and a property that is destroyed or expropriated. If you did not hold the property for under a year, the CRA says whether a sale is business income or a capital gain depends on the details of the situation.
Where do capital losses go?
If you sell a rental or investment at a loss, the loss first offsets capital gains in the same year. The CRA says a net capital loss can also be applied to taxable capital gains of the three preceding years and to any future years. So a bad sale this year can still get you tax back from a good one in the past.
What could throw off my numbers?
The adjusted cost base is the usual culprit. It isn’t always the price on the deed, since costs of buying can belong in it, and if you bought in stages you need a total. Selling costs go in their own box. Then check the inclusion rate: the inclusion rate is one-half for 2026 as it was for 2025, and on 21 March 2025 the Prime Minister said the proposed rise to two-thirds was cancelled. We couldn’t find a 2026 CRA guide page yet, so recheck once the 2026 forms are out.
Finally, a large gain raises your income for the year. That can shrink income-tested credits and benefits, which the tax credits calculator only partly covers, since it’s federal only.
What should you do before you sell?
Dig out the original purchase documents, the lawyer’s statement of adjustments and any receipts for work that added value, such as a new roof or an addition. Decide whether the property was ever your home, and for which years. Then work out roughly what the sale will cost in tax so you can set that money aside from the proceeds, rather than finding a five-figure bill at tax time. If the numbers are big, an hour with an accountant before you sign is cheaper than a correction afterwards.
Where this information comes from
The gain formula, loss carryover, the inclusion rate and the reporting steps come from CRA pages on Canada.ca (guide T4037 Capital Gains 2025 and the principal residence pages) and a Prime Minister’s release of 21 March 2025. The tax figures are our calculator’s 2026 estimates. This is an independent guide, separate from any government body.
Frequently asked questions
Do I pay capital gain tax when I sell my house?
Usually not on your principal residence, but the CRA only allows the exemption if you report the sale and designate the home on your return.
Which form do I use for a home sale?
Report the sale on Schedule 3 and complete Form T2091(IND). Each property sold in the same year needs its own form.
What if I forgot to report my home sale?
Ask the CRA to amend the return for that year. It may accept a late designation, and a penalty may apply.
How much of a rental gain is taxable?
Half of it, as in 2025 and still in 2026. The proposed rise to two-thirds was cancelled on 21 March 2025 per the Prime Minister's release.
Can a capital loss get me tax back?
A net capital loss can be applied against taxable gains of the three preceding years and future years, according to the CRA.
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