How it works: Capital gains tax on the sale of a property
Capital gains. Even the mention of these two words together can immediately conjure myths about owing the government 50% of the money earned from selling a home. But, like most rumours, it’s only half true.
Every week, our inbox is full of letters from readers asking how to avoid the capital gains tax. They want to know how to work the system and keep more money in their pockets. Listen, it’s valid to want to hold on to the money earned off of the sale of a secondary residence (cottage, second home) and an investment property (rental or commercial property). According to RE/MAX Canada’s Cottage Trends in Canada in 2023 report, the average price of a cottage in Canada is expected to rise this year by 0.9% from 2022—which is not small change. So, the idea that you’re forking over half your money simply isn’t true. The need to dispel this rumour is what inspired this guide to capital gains on the sale of property, which will answer the most common questions with our most popular articles on the topic.
And while we cannot show you how to avoid taxes (it’s one of two things you can’t avoid in life—death is the other), I can share insights on how to use any Canada Revenue Agency (CRA) rules in your favour.
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What are capital gains in Canada?
According to the MoneySense Glossary, “a capital gain is the increase in value on any asset or security since the time it was purchased, and it is ‘realized’ when the asset or security is sold.” In the case of this article, the asset we are dealing with is property, which could be a cottage, second home, investment or rental property, as stated above.
Watch: Capital gains tax, explainedCan you have a capital loss?
Our definition of capital gains begs the question: “Can you have a capital loss?” Yes, you can. A capital loss occurs when you sell a property for less money than you originally purchased it for. In some cases, you might be able to use a capital loss to reduce your income for your tax return, if you are reporting capital gains in the same year.
Speaking of tax, a capital gains tax is the money owed in taxes from the income earned. It’s not a specific tax, per se…. But more on that below.
For more on the ins and outs of how capital gains works, read: Capital gains explained.
How are capital gains calculated? How are they taxed?
Before we dive into the tax part, let’s go through how to calculate capital gains on the sale of a property. Essentially, this calculation figures out how much the property’s value grew from when you first bought it to the day you sold it.
CAPITAL GAIN = PURCHASE PRICE – SELLING PRICE
This above is a simple-math calculation of the capital gain. But, also can dive even deeper to reduce the amount of capital gains you would claim on your tax return (more on that below).
So, it’s not that capital gains are taxed at a rate of 50%, but it’s that 50% of the capital gains are taxable. And the capital gains tax rate depends on the amount of your income. You add the capital gain to your income for the year, including money you receive from your job, side hustles, dividends in non-registered accounts, any selling of assets and so on.
Capital gains are taxed as part of your income on your personal tax return. Below are the federal tax brackets for 2022, which can give you an idea of how much tax you may owe for the year. You will need to figure out the provincial tax bracket rate for your province or territory, too. Since Canada has a tiered tax system, you will have to do a bit of math to estimate your annual income tax, breaking down your total tax into the brackets, and the amount owed for each bracket.
The 2023 federal tax brackets in Canada
| Annual Income (Taxable) | Tax Brackets | Tax Rates | Maximum Taxes Per Bracket | Maximum Total Tax |
|---|---|---|---|---|
| Up to $53,359 | The first $53,359 | 15% | $8,003.85 | $8,003.85 |
| $53,359 to $106,717 | The next $53,358 | 20.5% | $10,938.39 | $18,942.24 ($8,003.85 + $10,938.39) |
| $106,717 to $165,430 | The next $58,713 | 26% | $15,265.38 | $34,207.62 ($18,942.24 + $15,265.38 |
| $165,430 to $235,675 | The next $70,245 | 29% | $20,371.05 | $54,578.67 ($34,207.62 + $20,371.05) |
| Over $235,675 | Over $235,675 | 33% | n/a | n/a |
Read on for the provincial and territorial tax brackets.
And, of course, to really get down to the nickel of how much you ultimately owe, you will need to do your tax return and receive a notice of assessment.
It’s worth noting that there can be other factors for calculating capital gains. Here are some articles that delve deeper into some of these specific situations.
- How is capital gains tax determined when a co-owned cottage is sold?
- Is there an exception for capital gains on the sale of a commercial property?
- How do I calculate the capital gain on real estate sold in Ontario?
Can you avoid capital gains tax?
It’s not so much that you can avoid capital gains tax, but that there are CRA rules that you can take advantage of to reduce the amount you may owe. Here are a few:
Principal residence exemption
First is the principal residence exemption. You don’t pay tax on the sale of your home, but you may have to for a secondary property or residence, and/or investment property. According to the CRA, a property is exempt from capital gains tax if your situation meets these four criteria:
- “It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation.
- “You own the property alone or jointly with another person.
- “You, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year.
- “You designate the property as your principal residence.”
Accounting for outlays and expenses
There is also accounting for outlays and expenses. From your capital gain, you can subtract the costs necessary for selling the property, such as renovations and maintenance expenses, finders’ fees, commissions, brokers’ fees, surveyors’ fees, legal fees, transfer taxes and advertising costs.
Claiming capital losses
You can also claim capital losses when you have capital gains. So if you have assets, not limited to property, that you earned income on, you can lower your gains by applying your capital losses to that amount (until it reaches $0). That can be losses from other property, investments in non-registered accounts, and other capital.
The Ask MoneySense column has answered the following questions on reducing the amount of income for capital gains:
- Which is better: Buy a parent’s house or inherit it?
- Can you make a claim for the 1994 capital gains exemption?
- Do you pay capital gains tax when buying out a sibling for an inherited property?
- Are interest payments tax deductible?
Who pays capital gains?
The obvious answer is whomever is earning the capital gain, right? Not always. There can be less obvious scenarios involving multiple owners or even unfortunate situations that include the death of a property owner. If that’s the case for you, our readers can relate. Here are some of the tricky circumstances they have faced when selling a property.
- With the right of survivorship, do I need to pay capital gains tax?
- Is there capital gains tax on dividing land on a double lot?
- Who pays capital gains tax when you’re getting a divorce?
Other questions about capital gains
We also have a category of questions about capital gains that can’t be categorized, but these articles are popular with readers. So we hope that they may be an asset to you, too—free of charge (see what I did there?).
- Does principal residence exemption apply when a senior sells their home after moving out?
- What are the tax implications of joint tenancy vs tenancy in common?
- Are there capital gains when you rent a place to family?
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