Yes. You can sell a house in Ontario when you owe more than it is worth, but the sale only closes if your lender agrees to discharge the mortgage for less than the full amount owing, and you remain responsible for the shortfall.
The reason comes down to title. Your mortgage sits on the property as a registered charge, and a buyer cannot take clear title until it is removed. The registrar removes it on proof the charge has been satisfied, meaning the lender was paid in full or agreed to accept less. Your lawyer orders a payout statement and applies the proceeds against it, a process covered in what happens to your mortgage when you sell your home in Ontario. When the proceeds fall short, the gap has to be funded, usually by you, in cash, on closing day.
Canada has no equivalent to the American short sale. No statute obliges a lender to approve a sale at a loss, so approval is a negotiation with its special loans department, and it goes better when that conversation happens before the property is listed.
Walking away does not end the obligation. Under Ontario's Land Registration Reform Act, every registered charge carries your personal promise to repay, so selling satisfies only the portion the price covers. Where two people are on title, each is usually liable for the whole remaining amount rather than half, and a lender has ten years under the Real Property Limitations Act to sue for it.
One misconception is worth clearing up. If you bought with less than twenty percent down, your insurance through CMHC, Sagen, or Canada Guaranty protects the lender, not you. Once the insurer pays the lender's claim it can come after you for what it paid out. See what mortgage default insurance actually does in Ontario.
Selling costs do not disappear because equity has. Commission, legal fees, and often a mortgage prepayment penalty come off the top and widen the gap. The Financial Consumer Agency of Canada does expect federally regulated lenders to consider waiving that penalty for a borrower at risk of default.
Refinancing out of the problem rarely works, because the Bank Act stops banks from lending above eighty percent of a home's value. What remains is a payment arrangement with your lender, renting the place out until values recover, or selling and funding the difference. Toronto condo owners who bought near the 2022 peak are most likely to be doing this math right now.
Related reading: what home equity is and how to calculate it, how much it costs to sell a house in Toronto, and what a power of sale is in Ontario.