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Thinking about selling your rental or secondary property? Before you do, it’s critical to understand how capital gains tax can affect your bottom line. This guide explains what you need to know, what’s changed, and how to plan ahead.
Capital Gains in Canada: What Real Estate Investors Need to Know
Thinking about selling your rental or secondary property? Before you do, it’s critical to understand how capital gains tax can affect your bottom line. This guide explains what you need to know, what’s changed, and how to plan ahead.
Capital gains taxation is an important consideration for property owners and investors across Canada, particularly those holding secondary residences and rental properties.
Understanding how capital gains work, the implications for your tax obligations, and how strategic planning can mitigate liabilities is essential for making informed financial decisions.
What Are Capital Gains?
Capital gains occur when an asset, such as real estate, is sold for more than its adjusted cost base (ACB), which includes the purchase price plus certain costs like legal fees, renovations, and selling expenses.
In Canada, 50% of a capital gain is taxable and added to the seller’s income for the year. This is known as the capital gains inclusion rate.
For instance, if a property is sold for $1 million and the ACB is $600,000, the gain is $400,000, of which $200,000 would be taxable.
The Impact on Real Estate, Including Rental Properties
Real estate, especially rental properties and secondary residences, is subject to capital gains tax unless the property qualifies as a principal residence.
The principal residence exemption allows homeowners to shelter the full capital gain from tax if certain criteria are met.
However, secondary residences and rental properties do not qualify for this exemption.
When selling a rental property, the taxable portion of the gain is added to your total income, potentially pushing you into a higher tax bracket.
Additionally, if Capital Cost Allowance (CCA) was claimed on the property to offset rental income, a portion of that may be recaptured and taxed as income, not a capital gain.
This creates a tradeoff between the benefit of reducing taxes annually versus facing higher taxes upon sale.
Balancing Timing and Tax Efficiency
One of the key challenges for property owners is timing the sale of a secondary property. Selling in a year when your other income is lower can reduce the overall tax impact.
Conversely, selling during a high-income year could significantly increase your marginal tax rate, resulting in a larger tax bill.
Tax planning strategies can help balance this tradeoff:
- Deferring the sale to a year with lower income
- Using capital losses to offset gains
- Transferring ownership to a spouse in a lower tax bracket (with caution, due to attribution rules)
These strategies highlight the importance of personalized tax planning, particularly when dealing with sizable capital assets like real estate.
Looking Ahead: Potential Tax Changes
In the 2024 federal budget, the government announced its intention to increase the capital gains inclusion rate from 50% to 66.67% for gains over $250,000, effective January 1, 2026.
This would have had significant implications for investors holding high-value assets, especially real estate.
The proposed change introduced further complexity, requiring even more careful consideration of timing and asset disposition.
However, on March 21, 2025, Prime Minister Carney announced that the Government of Canada will cancel the proposed hike in the capital gains inclusion rate, maintaining the current 50% inclusion rate.
This decision has been welcomed by many in the investment and real estate sectors, as it preserves the current planning frameworks and alleviates concerns of increased tax burdens on large asset sales.
Real-World Example
Consider a scenario where an Ontario investor sells a secondary rental property for $1 million in 2025.
The original purchase price was $500,000, with $50,000 in eligible improvements and $40,000 in selling expenses, bringing the adjusted cost base to $590,000.
The capital gain is $410,000, and 50%—or $205,000—is taxable. Assuming the seller falls into the 33% marginal tax bracket, the tax owing on the gain could be approximately $67,650.
Had the proposed inclusion rate increase to 66.67% been implemented in 2026, the taxable portion would have been $273,347, with an estimated tax burden closer to $90,000—illustrating the significant impact such a policy change could have had.
Making Informed Decisions
The decision to sell a secondary residence or rental property in Canada carries notable tax consequences. Capital gains tax, while only applied to 50% of the gain (for now), can substantially affect your net proceeds. Properly accounting for selling expenses, potential CCA recapture, and the timing of the sale are all vital to reducing your tax liability.
For real estate investors, the key lies in understanding how the rules apply, what tradeoffs exist, and how to plan effectively. Working with a financial advisor or tax professional can help navigate these complexities, ensuring that your investment decisions align with both your financial goals and the tax landscape.
Need personalized guidance? Contact Gerald Lawrence to book a private consultation and learn how to maximize your returns when selling investment properties.
📄 For a Downloadable Guide (PDF format):
Your Guide to Capital Gains Tax in Canadian Real Estate
Understand the Rules, Avoid the Pitfalls, and Maximize Your Profits
Presented by: Gerald Lawrence, REALTOR® | www.GeraldLawrence.Realtor – Coldwell Banker R.M.R. Real Estate, Brokerage
