Most homeowners in Ontario will not pay capital gains tax when they sell their home, thanks to the principal residence exemption. If your property was your principal residence for every year you owned it, the entire capital gain is tax-free. However, investment properties, second homes, and properties sold within 365 days of purchase may be treated differently.
The principal residence exemption, often called the PRE, is one of the most significant tax benefits available to Canadian homeowners. To qualify, the property must be a housing unit that you, your spouse or common-law partner, or your child ordinarily inhabited during each year of ownership. A family unit can only designate one property as a principal residence per year, so if you own both a house and a cottage, only one can be sheltered from tax in any given year.
Even when a sale is fully exempt, you are required to report it to the Canada Revenue Agency. Since the 2016 tax year, every disposition of a principal residence must be reported on Schedule 3 of your tax return, and you must complete Form T2091 to formally designate the property. Failing to report can result in penalties and denial of the exemption.
If you sell a property that was not your principal residence, such as a rental or investment condo, the gain is taxable. In Canada, 50% of a capital gain is included in your taxable income and taxed at your marginal rate. For Ontario residents in the highest tax bracket, the effective capital gains tax rate can reach approximately 26.76%.
There is an additional rule to be aware of. Since January 2023, Canada's residential property flipping rule deems any gain on a property sold within 365 consecutive days of purchase to be fully taxable business income rather than a capital gain. The principal residence exemption cannot be used in these cases. Narrow exceptions exist for qualifying life events such as job relocation, divorce, or a death in the family, but you must be prepared to document them.
For sellers of non-exempt property, the adjusted cost base matters. This includes your original purchase price plus eligible capital improvements and certain acquisition costs such as legal fees and land transfer tax. Routine maintenance does not count. The difference between your sale proceeds and the adjusted cost base, minus selling expenses, determines your capital gain. To learn more about what those selling expenses look like, read our guide on what are the costs of selling a condo in Toronto.