Introduction
Real estate in Canada appreciates. A property purchased for $400,000 in 2015 might be worth $600,000 in 2025. That $200,000 appreciation is partially taxable—potentially $43,400 in taxes.
But with strategic planning, much of this tax can be eliminated or deferred.
This guide covers how to minimize capital gains tax on real estate—through principal residence exemption strategy, timing, structure, and professional planning.
How Real Estate Capital Gains Tax Works
Basic Calculation
Capital Gain = Sale Price – Cost Basis
Taxable Amount = Capital Gain × 50%
Tax Owed = Taxable Amount × Marginal Tax Rate
Example:
- Buy property: $400,000
- Sell property: $600,000
- Capital gain: $200,000
- Taxable (50%): $100,000
- Tax owing (43.4% bracket): $43,400
Cost Basis Includes More Than Purchase Price
Don't forget to include in cost basis:
- Purchase price: $400,000
- Legal fees: $5,000
- Inspection and appraisal: $1,500
- Land transfer tax: $5,000
- Total cost basis: $411,500
This is critical. Many people forget transfer tax and legal fees, overstating their capital gain.
Adjusted Cost Basis with Improvements
Capital improvements (not repairs) increase cost basis:
- New roof: Capital improvement (increase cost basis)
- Roof repair: Deductible expense (rental property)
- Addition: Capital improvement
- Painting: Repair/maintenance
Example:
- Cost basis: $400,000
- New kitchen/bath renovation: $50,000
- Basement finish: $30,000
- Adjusted cost basis: $480,000
Proper documentation of improvements can reduce capital gains by $30,000-$50,000 (saving $13,000-$21,700 in taxes).
Principal Residence Exemption: The Best Strategy
The Rule
You can designate ONE property as principal residence:
- No capital gains tax on appreciation
- Applies to years you claim it as principal residence
- Applies to spouse's property too (one per couple)
This is the most powerful real estate tax tool available.
What Qualifies
Qualifying principal residence:
- House
- Condo/apartment
- Mobile home on owned land
- Cottage/vacation home (if you live in it)
- Boat/RV with accommodation (if you live in it)
Does NOT qualify:
- Investment rental property (normally)
- Land without dwelling
- Business property
Claim for Years You Own It
You can claim principal residence exemption for:
- Years you lived in the property
- Years your spouse lived in the property
- Years your child lived in the property (if dependent)
- Year of purchase AND year of sale (even if not full years)
You don't have to claim for every year. You can strategically choose which years to claim exemption on.
Example: Multi-Property Strategy
You own:
Property A: Primary home
- Bought 2010, lived 2010-2020
- Sold 2020 for $600,000 (cost $400,000)
- Claim exemption for all years
- Capital gain: $0 (fully exempt)
Property B: Vacation cottage
- Bought 2015, vacation property 2015-2025
- Worth $500,000 (cost $300,000)
- Appreciate $200,000
Strategic move:
- Designate cottage as principal residence for years 2022-2025 (4 years)
- That portion of gain is exempt
- Years 2015-2021 (6 years) are taxable
- Reduces taxable gain from $200,000 to ~$133,000
- Saves ~$29,000 in capital gains tax
Timing Principal Residence Claim
If selling property:
- Best timing: Sell after claiming exemption for maximum years
- Example: Own cottage 15 years, claim last 5 years as principal residence, then sell
- 5 years exempt + 10 years taxable = proportional exemption
Capital Gains Inclusion Rate Strategy
In 2024, capital gains inclusion rate changed:
- First $250,000 per year: 50% inclusion (previous rule)
- Above $250,000: 66.67% inclusion (new rule as of June 2024)
For individual taxpayers, the $250,000 exemption is LIFETIME TOTAL across all capital gains.
Tax impact:
Gain of $200,000:
- Fully 50% inclusion: $100,000 taxable
- Tax: $43,400 (43.4% bracket)
Gain of $400,000:
- First $250,000 at 50%: $125,000 taxable
- Next $150,000 at 66.67%: $100,000 taxable
- Total taxable: $225,000
- Tax: $97,650 (vs. $173,600 under old rules)
This changed tax planning significantly.
Strategic Timing of Sales
Timing for Tax Efficiency
Consider timing of property sale to minimize capital gains:
1. Spread across years if possible
– Sell property 1 in year 1 (recognize $200,000 gain)
– Sell property 2 in year 2 (recognize $200,000 gain)
– Spreads tax impact across years
2. Sell in low-income year if possible
– Taking sabbatical/career break?
– Sell property during that year
– Lower marginal tax rate on gain
– Example: $400,000 gain at 30% rate = $68,000 tax vs. $173,600 at 43% rate
3. Consider losses elsewhere
– If you have capital losses in one year
– Recognize capital gains in same year
– Losses offset gains, reducing net taxable gain
Strategies Using Corporate Structure
Principal Residence Exemption + Corporate Ownership
Principal residence exemption applies to:
- Individual-owned properties: Full exemption available
- Corporation-owned properties: NO exemption available (corporation can't have principal residence)
Tax impact:
- Personal ownership: $200,000 gain exempt from tax = $0 tax
- Corporate ownership: $200,000 gain fully taxed = $43,400 tax
Strategy: Keep principal residence in personal name (not in company).
Real Estate Investment Strategy
For investment properties:
- If buying rental properties: Corporate ownership can be beneficial
- Corporate tax rate (26%) lower than personal rate (43%)
- Hold indefinitely, defer capital gains
- If selling, plan for corporation/personal tax coordination
Depreciation Recapture on Rental Properties
Depreciation Deduction
Owners of rental property can deduct depreciation (Capital Cost Allowance in Canada):
- 4% per year on building value
- Example: $500,000 building = $20,000/year depreciation deduction
- Tax savings: $8,680/year (at 43.4% rate)
Capital Gains Tax on Sale
When you sell, depreciation is "recaptured":
- You claimed $100,000 depreciation over 5 years
- That $100,000 is recapture income (fully taxable)
- Tax owing: $43,400
Example:
- Buy rental $500,000
- Claim depreciation: $100,000 (over 5 years)
- Sell for $550,000
- Cost basis: $500,000
- Capital gain: $50,000
- Depreciation recapture: $100,000 (fully taxable income)
- Total taxable: $150,000
- Tax owing: $65,100
Strategic point: Plan for recapture tax when planning to sell rental property.
The Deemed Disposition on Death
Death Triggers Capital Gains Tax
On death (unless property goes to spouse):
- Properties deemed sold at fair market value
- Capital gains tax triggered on full appreciation
- Estate must pay tax or sell property
Example:
- You own rental property (cost $300,000, current value $600,000)
- You pass away
- Estate realizes $300,000 capital gain
- Tax owing: ~$65,100
- Estate must have cash to pay this or sell property
Principal Residence Exemption on Death
Principal residence exemption applies at death:
- Property designated as principal residence: No tax
- Passes to heirs tax-free
- Valuable estate planning tool
Strategy: Use Principal Residence Exemption Before Death
If you own multiple properties, designate principal residence strategically:
- Designate high-appreciation property as principal residence
- Let heirs inherit tax-free
- Other properties can appreciate without exemption
Example:
- You own primary home (already exempt) and cottage
- Cottage appreciated $400,000
- Designate cottage as principal residence for final 5 years of ownership
- When you pass away, exemption applies
- Heirs inherit cottage tax-free (or with partial exemption)
Real-World Example: Optimized Real Estate Sale
Situation: Ottawa resident owns:
1. Primary home: Worth $700,000, cost $300,000, owned 15 years
2. Rental property: Worth $500,000, cost $400,000, owned 10 years
Plan A (No Tax Planning):
Primary home:
- Capital gain: $400,000
- Exemption: Full (principal residence)
- Tax: $0
Rental:
- Capital gain: $100,000
- Taxable (50%): $50,000
- Tax: $21,700
- Total tax: $21,700
Plan B (Optimized):
1. Designate rental as principal residence for final 2 years
– 2 years exempt / 8 years taxable
– Partial exemption on $100,000 gain
– Reduces taxable gain to ~$60,000
– Reduces tax to ~$13,000
2. Sell primary home in high-income year, rental in lower-income year
– Spreads tax impact
– May reduce marginal rate
3. Claim all depreciation recapture at time of sale
– If claimed $80,000 depreciation, recapture $80,000
– Claim all in single year (or spread across years if possible)
Result:
- Plan A: $21,700 in tax
- Plan B: $13,000 in tax
- Savings: $8,700 (and potentially more with timing strategy)
Conclusion
Real estate capital gains tax can be significant—$50,000+ for typical Ottawa properties. With strategic planning:
1. Use principal residence exemption strategically
2. Plan timing of sales carefully
3. Document improvements to cost basis
4. Consider corporate vs. personal ownership
5. Work with tax professional on depreciation recapture
6. Plan for estate implications
The time to plan is BEFORE you sell, not after. Get professional advice to ensure you're optimizing your real estate tax situation.
Related Articles
- Article 5: Real Estate Investment Tax Strategies Guide
- Article 11: Business Succession Planning Strategies for Entrepreneurs
- Article 14: Corporate vs Self-Employed Tax Strategy Guide
Sources & References
- CRA Principal Residence Exemption
- CRA Capital Gains Rules
- CRA Capital Cost Allowance (Depreciation)
- CPA Canada Real Estate Tax Guide
- Ontario Real Estate Association
- Toronto Real Estate Board
- Canadian Real Estate Association
- Law Society of Ontario – Real Estate Lawyers
- Government of Canada Tax Planning
- Ministry of Finance Ontario
