Are you considering selling your real estate property? This process can raise many questions, especially when it comes to your taxes. Are you wondering if the capital gain realized is taxable or not? In most cases, 50% of the capital gain is subject to tax. However, certain conditions allow you to benefit from a partial or total exemption. The mortgage brokerage specialists at Xperto are at your disposal. Our team enlightens and accompanies you at every step when you sell your house and are looking for a mortgage.
Capital gain: definition and illustration for better understanding
When you sell a real estate property at a higher price than what you paid during purchase, the difference is called a capital gain.
For example, you bought a property for $250,000 in 2015. You sell your property in 2025 for $500,000. The capital gain is therefore $250,000: this value illustrates this principle, even if its actual calculation may include other more technical elements.
You’re selling a home: calculate your capital gain
Adjusted cost base (ACB) and net proceeds of disposition (PD): these two specific notions are often used to know how much you actually gain when selling your house:
- the ACB includes the initial purchase amount and all expenses you incurred to improve your property over the years, such as work, renovations, etc.,
- the net PD corresponds to the selling price of your property from which you subtract the fees related to the sale.
These fees to deduct in calculating the net PD may include, for example:
- commissions paid to your broker or real estate agent,
- your notary’s fees,
- appraisal, inspection, valuation or cleaning costs for your property,
- your moving expenses,
- possible penalties for early repayment of your mortgage.
To calculate your capital gain, you subtract the adjusted cost base (ACB) from the net proceeds of disposition (PD).
Good organization will allow you to account for all these elements with precision. The complete formula is written as follows: G = (SP – SE) – (PP + CC) where:
- G = capital gain
- SP = selling price of the property
- SE = selling expenses
- PP = purchase price of the property
- CC = capitalizable charges
Current tax measures on capital gains in 2025
When selling a house or residential building, the profit realized must generally be declared as taxable income.
Until June 25, 2024, the rule in effect taxed 50% of this gain. A new tax measure had been introduced from that date, increasing the inclusion rate to 66.7% for gains exceeding $250,000 per year.
After a change of administration, the authorities in place in Canada decided to reverse this measure. Finally, the new provisions planned for 2025 will no longer be applied. In 2025, the capital gains calculation thus remains based on a single inclusion rate of 50%, as before June 25, 2024.
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Taxation with a 50% inclusion rate:
50% of the capital gain is taxable. On a capital gain of $500,000 for example, the taxable amount is thus 50%, or $500,000 × 50% = $250,000.
The seller adds $250,000 to their taxable income in this case.
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Special case: scenario of two co-owners, each taxed at 50% for their respective share
The house sold can also be held by two co-owners. Each person is then taxed individually for their share of the capital gain. As each realizes a gain of $250,000, which represents half of the total gain of $500,000.
In this case, the taxable amount for each co-owner is 50% of the gain, or $250,000 × 50% = $125,000
Each co-owner thus adds $125,000 to their taxable income.
How can you get an exemption on capital gains?
To obtain an exemption on capital gains realized from the sale of your house or a building, there are several conditions to meet.
Types of eligible properties
An exemption from capital gains taxation on the sale of a house is only possible if the property is declared as the seller’s principal residence. Under the law, any real estate property is eligible for principal residence status, whether it’s a cottage, vacation home, or apartment in a condominium.
Only one criterion truly qualifies a house or cottage as a principal residence. It’s normal habitation of the real estate property for each civil year where the house is considered as principal residence. This condition offers a wide field of actions and interpretation possibilities. No minimum occupancy duration is stipulated regarding the principle of normal habitation. Validating this condition for a property then requires occupying the property for a short period of the year at least.
However, you cannot designate multiple real estate properties as principal residence in one year per household. Only one house per year can benefit from this status. This means that one spouse cannot declare a property as principal residence during a year, while the other spouse designates a house as such. For a deeper understanding of the concept of principal residence, consult the Revenu Québec website which addresses this subject in detail.
What is my principal residence?
Benefiting from the tax exemption on capital gains from the sale of your house requires choosing the property that will serve as principal residence well. This requires conducting an in-depth analysis of your real estate portfolio to make the right choice and can represent a real dilemma for you given the complexity of the task.
In these circumstances, assistance from professionals like the brokers at Xperto can be of great utility to you. We will help you designate the appropriate house or condominium apartment as principal residence, to fully benefit from its sale and obtain a tax exemption on capital gains.
The impact of rental
The exemption from capital gains taxation also depends on renting the house during its holding period. Let’s take the example of the owner of a duplex where a portion was rented during part or all of the property’s holding period. They wonder if the capital gain generated after selling this duplex will be exempt from taxes or taxed.
If the rental was done temporarily (short-term or occasionally), the duplex remains eligible for a tax exemption on capital gains. These are situations such as occasional rentals like Airbnb and similar, which last only a few weeks. If, on the other hand, it’s a long-term rental, only the part inhabited by the owner will be concerned by the tax exemption on capital gains. The part of the duplex rented will be taxed on the holding years where the property served as rental.
Your tax obligations
When you sell a house, cottage, or condominium apartment, your tax obligations vary according to the real estate property’s status: secondary or principal residence.
In the case of a secondary residence
The sale of real estate property that serves as secondary residence is taxable in all situations. The capital gain generated will be taxed at 50%. You will then have to add half of the capital gain from the sale of this house to your tax return at year-end. Income tax being progressive and dependent on the bracket in which your income falls, capital gains must be handled carefully to optimize your taxation.
However, you can deduct certain charges from the capital gain to reduce taxable income a bit. These are expenses related to any operation that improved the property. If it happens that the house or condominium apartment you consider as secondary residence has gained more value than the one where you reside most, selling the first can be very interesting. However, you will have to declare the least occupied property as principal residence to benefit from a tax exemption on its sale.
To succeed in this type of maneuver and profit from the fruits of your real estate investment, get accompanied by the brokerage professionals at Xperto.
In the case of a principal residence
Since 2016, the sale of real estate property considered as principal residence must absolutely be notified to the tax administration. To do this, fill out at minimum the form T2091 to designate the property to consider as principal residence with the CRA (Canada Revenue Agency). For this residence to be properly considered as principal for all years of holding, the declaration must be made for each year of ownership. The declaration form for each year can be requested by the CRA as supporting document to define your taxable income.
Also fill out the form TP-2074, which relates to the sale of property benefiting from principal residence status. The information that must appear there is mainly:
- the description of the principal residence sold,
- its selling price,
- its adjusted cost base,
- its sale date,
- its acquisition year…
These documents must be attached to your tax return.
What happens if you forget to declare the sale of your principal residence?
If the sale of the principal residence is not declared to the tax administration during the year, it cannot benefit from the capital gains exemption. 50% of the profit generated by the property sale will then be taxable. If you forget to declare the sale at year-end and to designate the sold property as principal residence for this same period, make a tax return modification. This procedure can lead to penalties you will have to pay.
It’s the smallest sum between a fixed fine of $8,000 and a second penalty. This is calculated by charging $100 per month for the year, starting from the last tax return filing deadline. The absence of declaration will have a much more negative consequence for the seller. The CRA will now have unlimited time to recalculate the tax owed regarding the sale and issue a new taxation. When the declaration is made according to standards, this deadline is rather 3 years after the sale.
How to calculate the exemption?
To calculate the tax exemption applicable to your capital gain, a simple formula exists. It consists of multiplying the capital gain by the number of years of designation as principal residence first. The value obtained is then divided by the total number of years of holding the real estate property.
E= (G* N1)/N2
E: Tax exemption
G: Capital gain
N1: Number of years of property designation as principal residence
N2: Number of years of property holding.
The number of years of housing designation as principal residence is composed of what you declare plus one year. This advantages you and even allows omitting one year of housing declaration as principal residence, to attribute this status to another property during this period. You can perform this maneuver over several years to benefit from tax exemptions on the subsequent sale of your other real estate properties.
When calculating your capital gain for the sale of your house, make sure to properly add capitalizable charges to the original purchase price of the sold property. This allows reducing the taxable margin. Capitalizable charges include all expenses incurred on the housing that give it a lasting advantage. These are, for example, additions of elements like a garage or pool. They also include replacements of original coverings with others of better quality, with superior durability.
Better understanding the exemption principle with a practical case:
In 2010, Benoît and Charlotte acquire a cottage for $150,000. In 2023, they decide to sell their property for $500,000, realizing a capital gain of $350,000. To optimize their tax situation, they designate the cottage as principal residence for the period from 2015 to 2023, or 8 of the 13 years during which they owned it. The law allows them to add one additional year in calculating their exemption.
To determine the amount of their tax exemption, they use the following formula: (G*N1)/N2, where:
- G represents the capital gain realized when selling the cottage, $350,000;
- N1 corresponds to the number of years where the cottage is designated as principal residence + 1 (or 8 + 1 = 9),
- N2 indicates the number of years of cottage ownership, 13.
By applying this formula, they obtain an exemption of $242,308 ($350,000 × 9 ÷ 13). They will finally be taxed only on half of the non-exempt capital gain, or $53,846, or 50% of $350,000 – $242,308.
The principle of this exemption reduces tax on capital gains related to the sale of property used as principal residence. The longer a property is designated as such, the higher the exemption.
Some key elements to remember:
- it’s possible to designate only one principal residence per year;
- form TP-274 must be completed to make this designation;
- it’s essential to keep proof to justify this designation with the Canada Revenue Agency, the CRA.
Capital gains: tips to keep in mind
Benefiting from a tax exemption requires respecting precise rules. They relate to:
- designating this property as principal residence,
- its effective occupation during the declared years,
- declaration to the tax authorities during the year it took place or modification of subsequently declared income.
For this, organize your file well by carefully keeping all proof that might be required to validate the tax return. These are mainly purchase and sale documents for the property, principal residence declarations, or invoices related to property improvement work. You must also keep receipts for expenses related to the property sale.
Managing this entire procedure well is a very complex task that can quickly mislead owners with little experience. The tax rate increasing in steps with the bracket of declared income, benefiting from an exemption represents a major asset for your personal taxation. Therefore, seek professionals in the field to make your property sale according to the rules and fully profit from your real estate transactions.