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Capital gains on property are taxed only when you sell, and your principal residence is usually exempt. For a rental or second property, you add half of the gain to your income. Selling a rental in Ontario for $155,000 more than it cost, with $90,000 of other income, adds $30,729 of tax in our calculator.
When is a home sale free of capital gains tax?
Per the Canada Revenue Agency, a property that was solely your principal residence in each year of ownership carries no tax on its gain. To count, it has to be a housing unit you own, and someone in your family (you, a spouse or partner, or a child) must have lived there for part of the year. And you have to designate it.
Only one home per family can be designated for each year. That matters if you own a house and a cottage, because each year’s designation goes to one of them. If the home wasn’t your principal residence for all the years you owned it, only part of the gain may be sheltered.
Most people assume the sale of the family home is invisible to the CRA. It isn’t. Since the 2016 tax year, the exemption is granted only when you report the sale and the designation on your return, using Schedule 3, and from 2017 also Form T2091. The CRA’s principal residence page says you have to report the sale and designate the property on Schedule 3. Skip it and you may need a late designation, which the CRA says can carry a penalty.
So file it. Even when the tax is zero, the CRA wants to see the sale, the designation and the years you claim, all on the return for the year you sold.
How is the gain on a rental or second property worked out?
The gain is what you sold it for, minus what you paid, minus the costs of selling. Half the gain lands on top of the rest of your income that year. That half is taxed at your normal rates, so your other income sets the bill.
We can’t cite a CRA page for the 2026 inclusion rate, so we use 50%. A proposal to raise it to two-thirds was cancelled in a release from the Prime Minister on March 21, 2025. Look up the CRA’s current page in the year you sell.
| Item | Amount |
|---|---|
| Sale price | $500,000 |
| What you paid | $320,000 |
| Selling costs | $25,000 |
| Gain | $155,000 |
| Half added to income | $77,500 |
Selling costs are things like the agent’s commission and legal fees on the sale, and they come off before you work out the gain. Your purchase cost can also include costs of buying and money spent on improvements, which is why keeping the paperwork for years pays off at sale time. Picture Dana in Barrie, who sold a cottage she’d owned for 20 years: finding the old closing statement and renovation invoices was the hardest part of the job.
What does the tax bill look like at different incomes?
This is the same Ontario sale run through the capital gains tax calculator with two levels of other income.
| Other income | Extra tax | Share of the gain | Gain you keep |
|---|---|---|---|
| $90,000 | $30,729 | 19.8% | $124,271 |
| $40,000 | $22,248 | 14.4% | $132,752 |
The gap is about $8,500 on the same house. If you have a say in when you sell, a low income year can save real money. Retiring in March and selling in April is a different tax story from selling in December.
What happens when a home becomes a rental?
A change in use is a trap. The CRA says that every time you change the use of a property, you’re treated as if you sold it at fair market value and bought it back for the same amount. So moving out and renting your house can trigger a deemed sale, even though you haven’t sold anything.
There’s a limit to what rental use does. A property can stay a principal residence, says the CRA, if the income use is secondary to living there, there are no structural changes, and you claim no capital cost allowance. Rent a spare room and you may be fine. Convert the basement to a separate unit and claim depreciation, and you may not be.
Because this is where people lose money, read the CRA’s principal residence page before renting out a house you hope to sell without tax. If the numbers are big, an accountant who handles real estate is worth the fee.
How can you plan the year of the sale?
Three things are worth a look before you sign. First, timing: the table above shows how much your other income in the sale year matters, so a sale straddling a low-income year can be cheaper. Second, records: gather the purchase statement, the receipts for big repairs and the sale statement now, not at tax time. Third, the designation: if you own a house and a cottage, work out which one carries the exemption for which years before either goes on the market. A few hours of homework here can be worth a few thousand bucks.
What does the calculator not cover?
- A loss shows zero tax. It doesn’t carry the loss to another year.
- Your cost should include buying costs and improvements. Keep the paperwork.
- Part-year exemptions and multiple designations need the CRA worksheet first.
- A home sold through a business, or with foreign property, is outside the tool.
To see what you actually walk away with, try the home sale proceeds calculator. On a $950,000 sale with a $380,000 mortgage, a 5% commission and some costs, it shows $511,325 left. And for the tax on your other income, the income tax calculator gives the full picture.
Our sources
The principal residence rules, the designation and reporting rules and the change in use rule come from Canada Revenue Agency pages, read in September 2026. Tax steps are the 2026 federal and Ontario figures in our calculator. The examples are our own, and the 50% inclusion rate is an assumption for 2026.
Frequently asked questions
Do I pay capital gains tax when I sell my house?
Not if it was your principal residence for every year you owned it and you report and designate it. Otherwise part of the gain may be taxed.
Do I have to report the sale of my main home?
Yes. The CRA allows the exemption only if you report the sale and designation on your return, using Schedule 3 and Form T2091.
How much of a gain is taxable?
We use 50% for 2026, since no CRA page for that year was confirmed. The proposed rise to two-thirds was cancelled on March 21, 2025.
Can I have two principal residences?
Only one home per family can be designated for each year.
What if I move out and rent my home?
The CRA says a change in use is treated as a sale and repurchase at fair market value.
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