Yes, you can sell your house to a family member below market value in Ontario. The catch is that the Canada Revenue Agency does not accept the discounted price for tax purposes. When a home changes hands between related people, the seller is treated as if it sold at fair market value, no matter what actually changed hands.
Section 69 of the Income Tax Act governs transactions between people who are not dealing at arm's length, which includes parents, children, siblings and spouses. If you sell your house to your daughter for $400,000 and it is worth $900,000, the CRA deems your proceeds to be $900,000. Your capital gain is calculated on that higher figure.
If the house was your principal residence for every year you owned it, the principal residence exemption shelters the gain and the deemed price costs you nothing in tax. The rule bites when the property is a rental, a cottage or a second home. In those cases the seller pays tax on a gain they never received in cash.
There is a second problem on the buyer's side. Your daughter's cost base is what she actually paid, $400,000, not the deemed $900,000. If she later sells for $900,000, she is taxed on a $500,000 gain that you were already taxed on. An outright gift avoids this because the recipient of a gift is deemed to acquire the property at fair market value.
Ontario Land Transfer Tax and Toronto's municipal land transfer tax are charged on the value of the consideration, which is whatever the buyer gives up to get the property. A true gift with no money and no mortgage carries no consideration, so no tax is owed and the transfer is registered as a gift for natural love and affection. Once money changes hands, or the family member assumes an existing mortgage, that amount becomes the consideration and land transfer tax is calculated on it. Spouses have a specific exemption that covers an assumed mortgage. Parents and children do not.
Most family buyers still need a mortgage. Lenders will order an appraisal and usually treat the difference between the appraised value and the purchase price as a gifted down payment from the seller, documented with a gift letter.
Before settling on a number, get a written appraisal so everyone agrees on fair market value, and have an accountant and a real estate lawyer review the structure. Each side should have independent legal advice.
Related reading: Do You Pay Capital Gains Tax Selling Your Ontario Home?, How Is Ontario Land Transfer Tax Calculated in Toronto?, and How Does a Gifted Down Payment Work in Canada?.