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How to Avoid Capital Gains Tax on Property in Canada


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For many Canadians, tax season is a stressful time of year. While most investors have to worry about calculating taxes for their stocks, real estate investors will feel the pinch of capital gains from selling properties. In Canada’s red-hot housing market, this can make for an expensive tax bill from the CRA.

In this article, we will talk about what capital gains taxes are, what it means when it comes to real estate properties, and how to avoid capital gains taxes on property in Canada.

What is Capital Gains Tax?

Capital gains tax is the taxes you pay on the value of your investments, increasing from the time you bought to the time you sold.

The simplest way to think about it is to understand you will pay taxes on any realized profits you make while investing. Of course, this does not apply to tax-sheltered accounts like a TFSA or RRSP.

But for property in Canada, prepare to pay capital gains taxes on any property you sell that is not your primary residence. If you sell the property for less than you bought it for, you will incur a capital loss. This can be used to offset any capital gains you made on other investments.

How is Capital Gains Calculated?

Capital gains taxes in Canada are a relatively simple calculation. The same rules apply no matter what the investment asset is:

The capital gains tax rate taxes you on 50% of your realized capital gains.

What does that mean? Here is an example to illustrate how your capital gains would be taxed in Canada.

Let’s say you purchase a property in Canada for $500,000.

After renting it out for two years, you decide to sell the property because the market has picked up.

You end up selling the property for $700,000. Your realized capital gains are $200,000.

But, you will only be taxed on 50% of those capital gains, or $100,000.

Now, this is a very simplistic view. Other things can reduce your capital gains, such as the expenses you incurred to sell your property. These include escrow fees, lawyer fees, and settlement costs.

What happens to that $100,000 in capital gains that are taxed? It is added to your annual taxable income for that year and will be taxed at your marginal tax rate.

Do You Pay Capital Gains Tax on Your Primary Residence?

No, you will not pay capital gains tax on your primary residence in Canada. What defines a primary residence in Canada?

There is no defined time that you need to live in that residence. If you claim it is your residence, the CRA can audit you on things like your utility bills and any rental income that was earned.

You can rent out your primary residence, but you must prove you lived there at some point. If you rent a portion of it out as an Airbnb, you still qualify for the primary residence tax exemption. As of 2023, you can only have one primary residence in Canada.

Can You Avoid Capital Gains Tax on a Rental Property?

You will pay capital gains tax on any property you sell in Canada that is not your primary residence. Unfortunately, there is no way to avoid them completely.

If you want to reduce a high capital gains tax on your income taxes, there are some ways that you can reduce your tax burden.

Related: New to Canada Mortgage Programs

How to Avoid or Reduce Capital Gains Tax When Selling Property in Canada

Offset with Capital Losses

This might be easier said than done, but you can offset your capital gains with capital losses. If you own other assets, such as stock or ETFs, selling them at a loss can help to ease the burden.

This can be a difficult thing for long-term investors, but remember that you can always buy those assets back in the future. Unfortunately, if you have been sitting on those stocks for years now, you are probably in the green, which will not help to offset capital gains.

If you sold another property at a loss, you could also use those losses to offset your gains from this property.

Wait to Sell at the Right Time

What is the definition of the right time? Well, you can time your sale to coincide with a down year in the stock market, where your investments might be at a loss. You can also wait until retirement, when your income should be much lower.

If you or a spouse loses their job, quits, or retires, then it might be an opportune time to sell. We realize life does not always work this way, but if the opportunity does arise, you can save some money come tax season.

Take Advantage of Tax-Advantaged Accounts

One great way to reduce your capital gains taxes each year is to make most of your investment in a TFSA or RRSP. The TFSA is a completely tax-free way to invest, while an RRSP defers the taxes until you cash out your investments.

This might not be an option for most, but you can donate your property to a charitable cause. This will reduce your capital gains by a significant amount (up to 20%).

Incorporate Your Rental Business

You can incorporate your rental business to avoid paying some taxes on your personal income taxes. Unfortunately, this can come with even more costs than usual.

This can reduce your capital gains tax, but you will need to see if the corporation fees make this option negligible in the long run.


How long do you have to keep the property to avoid capital gains tax?

There is no defined duration, but most people agree that living in it for one year allows you to claim it as your primary residence and avoid capital gains tax.

What are the ways to avoid capital gains tax in Canada?

To avoid capital gains tax in Canada, you can offset your gains with capital losses, incorporate your rental business, donate your property, and make sure your investments are in tax-sheltered accounts.

Are there exemptions for capital gains in Canada?

Yes, there are. If the property is your principal residence, you will avoid paying capital gains taxes. Likewise, if it is a qualified farm or fishing property you might be eligible for a capital gains tax exemption.

How long do I need to live in a house to avoid capital gains in Canada?

The standard belief is one year as your primary residence, although there is nothing set in stone by the CRA.

What is capital gains tax on second property in Canada?

The capital gains tax on a second property that is not your primary residence is calculated by taking 50% of your capital gains and adding it to your annual taxable income.

What is the lifetime capital gains exemption in Canada?

This is an amount that Canadians can use as a capital gains exemption in Canada. You might be eligible if you sell a qualified farm or fishing property or a disposition of qualified small business corporate shares.

Related: Find out these commonly missed tax deductions and credits.


Gravatar for Enoch Omololu, MSc (Econ)
Enoch Omololu, MSc (Econ)

Enoch Omololu, personal finance expert, author, and founder of Savvy New Canadians, has written about money matters for over 10 years. Enoch has an MSc (Econ) degree in Finance and Investment Management from the University of Aberdeen Business School and has completed the Canadian Securities Course. His expertise has been highlighted in major publications like Forbes, Globe and Mail, Business Insider, CBC News, Toronto Star, Financial Post, CTV News, TD Direct Investing, Canadian Securities Exchange, and many others. Enoch is passionate about helping others win with their finances and recently created a practical investing course for beginners. You can read his full author bio.

About Savvy New Canadians

Savvy New Canadians is one of Canada's top personal finance platforms. Millions of Canadians use our site each year to learn how to save for retirement, invest smartly, maximize rewards, and earn extra cash. We have been featured in prominent finance media, including Forbes, Globe and Mail, Business Insider, CBC, MSN, Wealthsimple, and TD Direct Investing. Learn more about Savvy New Canadians.

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