Capital gains: the phrase often sparks myths about handing over half the proceeds when you sell a property. While there is a kernel of truth to that claim, the reality is more nuanced. This guide explains how capital gains work in Canada, how they are calculated and taxed, and which rules or exemptions can reduce what you owe when selling a cottage, second home, rental, or other investment property.
Each week we receive many questions from readers about how to minimize capital gains tax. Wanting to keep more of the profit from the sale of a secondary residence or an investment property is understandable. Although it’s impossible to avoid taxes entirely, you can use Canada Revenue Agency (CRA) rules and legitimate tax provisions to reduce the taxable portion of a capital gain. Below we summarize the essentials and link to helpful deeper dives on specific scenarios.
What are capital gains in Canada?
A capital gain is the increase in value of an asset between the time you acquired it and the time you sold it. For the purposes of this article, the asset is real estate: a cottage, second home, rental property, or commercial property. A gain is “realized” when the property is sold and you receive proceeds above your original cost.
Can you have a capital loss?
Yes. A capital loss occurs when you sell a property for less than you paid for it. Capital losses can offset capital gains reported in the same year and may reduce your overall tax bill. In some cases you can carry capital losses back to a prior tax year or forward to future years within CRA rules.
Informally people refer to “capital gains tax,” but capital gains are not taxed under a separate tax; rather, a portion of the capital gain is included in your taxable income and taxed at your marginal income tax rate.
For more detailed background on how capital gains operate, see: Capital gains (MoneySense glossary).
How are capital gains calculated? How are they taxed?
To determine your capital gain on a property, subtract the original purchase price (adjusted cost base) from the selling price, after accounting for allowable costs. In short:
Capital gain = selling price – purchase price (adjusted cost base)
The adjusted cost base can include the purchase price plus certain acquisition costs and capital improvements that increase the property’s value. When you sell, you can deduct selling expenses such as real estate commissions, legal fees and advertising from the proceeds to calculate the gain.
Only a portion of the capital gain is taxable. In Canada, 50% of the realized capital gain (the “taxable capital gain”) is included in your taxable income for the year. That taxable amount is then taxed at your marginal federal and provincial tax rates. Because Canada uses a progressive tax system, the tax you pay depends on your total taxable income for the year—your salary, other investment income, and the taxable portion of any capital gains combined.
Below are the federal tax brackets for 2024 to help estimate how additional income may be taxed; provincial or territorial rates must be added to determine your final marginal rate.
| 15% | Up to $55,867 |
| 20.5% | $55,868 to $111,733 |
| 26% | $111,734 to $173,205 |
| 29% | $173,206 to $246,752 |
| 33% | $246,753 or more |
To estimate your actual tax liability you must combine federal and provincial rates and complete your tax return; your notice of assessment will confirm the final amount owing.
For additional details about calculating capital gains and special situations, see related articles on the topic.
- Cutting down on tax payable when selling real estate
- Transferring ownership and probate tax considerations
Can you reduce or avoid capital gains tax?
While you generally can’t avoid reporting a capital gain, there are legitimate provisions and exemptions that can reduce or eliminate taxable capital gains. Key options include:
Principal residence exemption
The principal residence exemption can eliminate tax on the sale of a property that qualifies as your principal residence. According to the CRA, a property is eligible if it meets these conditions:
- It is a housing unit, a leasehold interest in a housing unit, or a qualifying share in a co-operative housing corporation.
- You own the property, either alone or jointly.
- You, your spouse or common-law partner, or one of your children lived in the property at some time during the year.
- You designate the property as your principal residence for the years it was your primary home.
Accounting for outlays and expenses
You can reduce the capital gain by subtracting reasonable selling costs and by adding eligible capital expenditures to your adjusted cost base. Deductible selling expenses can include real estate commissions, legal fees, surveyor fees, transfer taxes, advertising, and costs of necessary repairs and upgrades that are capital in nature.
Claiming capital losses
Capital losses from other investments or property sales can offset capital gains. If losses exceed gains, you may be able to carry them back or forward according to CRA rules to reduce taxable gains in other years.
For practical examples and specific scenarios, see these Q&A and guidance articles:
- When the “plus one” rule applies to a principal residence
- How capital gains are handled in divorce
- Selling property to family: capital gains implications
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Who pays capital gains tax?
The person who realizes the gain—typically the seller—is responsible for reporting the taxable portion on their tax return. Ownership structure matters: if a property is co-owned, each owner generally reports their share of any gain. Complex situations, such as transfers between family members, sales on death, or estate administration, can change who reports and pays tax. If you face a non-standard scenario, seek tailored advice or consult the CRA guidance.
- How to carry back a capital loss for a tax refund
- Tax implications of buying a second home in Canada
- Claiming the principal residence exemption when family members move in
Other frequently asked questions
Readers often ask about specific situations—renovations, moving into a rental property, joint tenancy on death—and how those choices affect capital gains. The articles below cover those common scenarios with practical tips to reduce taxable gains where possible.
- How cottage renovations can reduce your capital gains
- Can moving into your rental property reduce tax?
- Principal residence exemption on death and joint tenancy effects
Understanding capital gains and the applicable exemptions can help you plan sales and minimize tax liability. When in doubt, keep careful records of purchase prices, capital improvements and selling costs, and consider professional tax advice for complex situations.