How Capital Gains Tax Affects Real Estate Sales in Ontario
Hi, WealthTrack founder David Pipe here. Selling real estate in Ontario can be a significant financial event, especially when it involves properties other than your primary residence. One important factor many sellers need to understand is how capital gains tax works and how it can impact the amount of money you ultimately keep from the sale.
This article breaks down the basics of capital gains tax on real estate sales in Ontario, explains who is affected, and offers tips on how to plan for and possibly reduce these taxes.
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What is Capital Gains Tax?
Capital gains tax is a tax on the profit (or “gain”) you make when you sell a capital asset for more than its purchase price. In Canada, this includes real estate, stocks, bonds, and other investments.
When you sell a property, the capital gain is calculated as:
Capital Gain = Sale Price – Adjusted Cost Base (ACB) – Selling Costs
Sale Price: The amount you sell the property for.
Adjusted Cost Base (ACB): What you originally paid for the property plus any eligible expenses that increase its value (such as renovations).
Selling Costs: Fees like real estate commissions and legal fees.
Primary Residence Exemption
The most common exemption from capital gains tax on real estate is the Principal Residence Exemption (PRE). If the property you sell was your primary residence for every year you owned it, you usually won’t owe any capital gains tax on the sale.
What Qualifies as a Primary Residence?
A primary residence is a home you ordinarily live in during the year. If you own multiple properties, you can designate only one as your principal residence per year for tax exemption purposes.
When Does Capital Gains Tax Apply to Real Estate?
Capital gains tax applies to real estate sales when the property is not your principal residence. Here are some common examples:
Rental Properties: Houses or condos you rent out to tenants.
Vacation Homes or Cottages: Properties you own for personal use but do not live in year-round.
Inherited Property: If you inherit a property but don’t live in it, selling it may trigger capital gains tax.
Land or Commercial Properties: Properties used for business or investment purposes.
How Capital Gains Tax Is Calculated in Ontario
In Canada, including Ontario, capital gains tax is not a flat tax on the total gain. Instead, only 50% of the capital gain is taxable and added to your income for the year. This is called the “inclusion rate.”
Example Calculation
Let’s say you sold a rental property:
Purchase price: $300,000
Selling price: $500,000
Selling costs (agent, legal fees): $20,000
Adjusted Cost Base: $300,000 (assuming no improvements)
Capital Gain = $500,000 - $300,000 - $20,000 = $180,000
Taxable Capital Gain = 50% of $180,000 = $90,000
This $90,000 is then added to your taxable income, and you pay tax based on your marginal tax rate.
Reporting Capital Gains on Your Tax Return
When you sell a property subject to capital gains tax, you must report it on your annual tax return using Schedule 3: Capital Gains (or Losses). You’ll need to fill out details about the property, the adjusted cost base, selling price, and expenses.
Failing to report capital gains can lead to penalties and interest from the Canada Revenue Agency (CRA).
Special Considerations for Inherited Real Estate
In Ontario, when you inherit property, the capital gains tax rules are slightly different. The property is deemed to be sold at fair market value on the date of death, which means the “cost base” for the inheritor is the property’s value at that time.
If you sell the inherited property for more than this value, you may owe capital gains tax on the difference. However, if you sell it for less, there is no capital loss recognized for tax purposes.
Capital Gains and Probate Fees
It’s important to note that capital gains tax and probate fees are separate costs when dealing with real estate in an estate context.
Probate fees (Estate Administration Tax in Ontario) are based on the total value of the estate assets.
Capital gains tax applies to the profit realized on the sale of property.
Both can significantly affect the net amount beneficiaries receive.
How to Reduce or Defer Capital Gains Tax When Selling Real Estate in Canada
Capital gains tax can have a big impact when you sell or transfer real estate. More Canadians are looking for ways to help their kids buy their first home, and you should plan ahead for potential tax liabilities. Whether it’s a cottage, a rental property, or a family home, there are legitimate strategies to help you reduce or defer the tax bill. These strategies are not one-size-fits-all, and we always recommend working closely with a qualified financial planner and tax professional to find the right approach for your situation.
1. Maximize the Principal Residence Exemption to Avoid Capital Gains Tax
If you own more than one property, you can only designate one property per year as your principal residence. This exemption can fully or partially eliminate capital gains tax on the sale of that property. Choosing which property to designate and when is a strategic decision—especially if you own a high-growth asset like a cottage or secondary home. Keep detailed records to support your designation.
2. Hold Real Estate Longer to Lower Your Tax Bill
Holding real estate longer gives you time to:
Plan your exit strategically,
Time the sale during lower-income years,
Reduce the risk of being reassessed as a business (in the case of frequent flips), and
Build liquidity to cover future taxes.
Longer holding periods also provide the space to align your real estate plans with other goals, such as retirement or estate planning.
3. Increase Your Adjusted Cost Base with Capital Improvements
Every dollar you spend on improvements—such as a new roof, kitchen renovation, or septic system—can increase your adjusted cost base (ACB) and reduce your taxable gain. Keep receipts and records from day one. This isn’t just good practice—it can save you thousands at tax time.
4. Know the Capital Gains Tax Rules When Gifting Property in Canada
Transferring a property to a family member (e.g., a parent gifting a cottage to their children) is considered a deemed disposition. That means you’ll be taxed on the fair market value at the time of transfer, even if no money changes hands.
That said, in some cases, gifting can align with your long-term intentions and estate planning goals—especially when combined with insurance or trust strategies. But the tax bill is real and immediate, so get advice before making any moves.
5. Use Trusts and Rollovers to Defer Capital Gains Tax
Certain structures can defer—not eliminate—capital gains tax:
Spousal Rollovers allow a property to transfer to a spouse or spousal trust on a tax-deferred basis.
Alter Ego and Joint Spousal Trusts (for individuals over age 65) can allow property to transfer into the trust without triggering tax.
Corporate Structures or family trusts may allow for longer-term deferral of gains, but come with complexity, setup costs, and the 21-year deemed disposition rule.
These strategies must be tailored to your needs and should always be reviewed by your advisory team.
6. Work with a Tax and Estate Planning Team to Optimize Outcomes
Financial planning is a team effort. Your financial planner helps you see the big picture and make informed choices. But we’ll often collaborate with accountants, lawyers, and other professionals to ensure your plan is technically sound, tax-compliant, and legally documented.
Get Professional Advice
Hello, I’m David Pipe. At WealthTrack, we can help you reach your financial goals — book a free 15-minute call with us today to find out how to get started.
Final Thoughts: Make Tax Planning Part of the Plan
Capital gains tax in Ontario impacts the sale of real estate properties that are not your primary residence, including rental properties, vacation homes, and inherited real estate. Understanding how to calculate, report, and possibly minimize this tax can save you significant money. Always keep thorough records and seek professional advice when dealing with complex situations to ensure compliance and optimal tax planning. Minimizing capital gains tax isn’t about last-minute moves—it’s about consistent, integrated planning. From the day you buy a property to the day it changes hands, having a strategy in place makes a big difference. Whether you're thinking about selling, gifting, or holding for the next generation, let’s work together to create a plan that reflects your values, protects your legacy, and respects the tax rules.
