How to Avoid Capital Gains Tax When Selling Property | Finder Canada (2024)

When putting your second home or income property on the market, taxes are inevitable – especially if you made a profit on the sale. But there are few strategies that can help you avoid capital gains tax in Canada when you sell your home. As home prices continue to surge, here’s how to minimize how much of your profits go to the government — a fee known as capital gains tax.

What is capital gains tax?

Capital gains tax is a tax you pay to the government when you make a profit by selling your investment property (or something else of value) for more than you originally paid for it. For example, if you spent $310,000 on buying a house years ago and sold it for $500,000 today, then your “capital gains” would be $190,000, and you’d have to declare this amount along with your other income on your tax return. We’ll discuss how much of your profit is taxed and how that is calculated below.

There are ways to minimize your tax bill, however, and you may even be exempt from paying tax altogether if the property you sold was your primary home.

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How to calculate capital gains tax on the sale of property

In Canada, you only pay tax on 50% of any capital gains you realize. This means that half of the profit you earn from selling an asset is taxed, and the other half is yours to keep tax-free.

To calculate your capital gain or loss, simply subtract your adjusted base cost (ABC) from your selling price. Divide that number in half (50%) and that amount will be taxed according to your income tax bracket, the province you live in, and your personal living situation.

Your “adjusted base cost” (ABC) is your purchase price: what you paid for the property plus other costs incurred in the purchase such as commissions, legal fees and additions or improvements to the property.

Here’s an example. Let’s say that years ago you paid $250,000 for a house in Ontario. At that time, you paid $7,000 in taxes and closing fees plus another $28,000 on additions and renovations to the property. In this case, you would add all those expenses together to arrive at an adjusted base cost of $285,000. See the breakdown below:

Now, let’s say you sold this home for $450,000. To calculate your taxable profit, you’d subtract your ABC from the price you sold it for. Then to determine the amount that will be taxed, just divide your capital gain in half:

Your taxable profit on the sale is $82,500, which would be added to the rest of your income and taxed accordingly by the CRA based on your personal circ*mstances. While the same rules apply to all gains and losses from real estate sales, the rate at which gains are taxed is ultimately based on the income tax bracket you fall into. The other half of your capital gains – also $82,500 – can be pocketed tax-free.

Is my primary home exempt from capital gains tax?

Yes! The CRA will allow the sale of your primary residence to be tax exempt as long as it was your principal place of residence for every year that you owned it. To claim the exemption, you must report the sale on the following tax forms:

• Schedule 3, Capital Gains or Losses
• Form T2091 (IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust)

If you don’t report the sale on these forms, then whatever profit you made from the sale of your property could be subject to capital gains tax. See the Government of Canada website for more details.

Can I avoid capital gains tax on the sale of my rental property in Canada?

Unfortunately, you can’t. You can only avoid capital gains tax on property that is your primary residence. All other property sales are subjected to capital gains tax.

How can I reduce capital gains tax on a property sale?

If your property isn’t exempt from capital gains tax, there are a few strategies to minimize the amount you have to pay or possibly eliminate it altogether.

1. Use capital losses to axe your capital gains

A capital loss occurs when you lose money because your home (or other asset) decreases in value. As with capital gains, the loss is “realized” when you sell your home and “unrealized” if you continue to hold onto it. The CRA allows you to use your capital losses to offset your capital gains down to zero.

CRA rules allow you to offset your capital gains tax by the amount of your capital losses, which can be very useful when trying to lower you tax bill.

Even more conveniently, if you don’t have any capital gains to offset in the same year that you earned a capital loss, you have 2 options:

• Apply your capital losses to any capital gains you earned in the the past 3 years and amend your prior tax bill(s).
• Carry forward your capital losses to reduce capital gains in the future. Conditions apply, so see a tax professional and check out the Government of Canada website for more details.

For example, let’s say you sold an asset and earned a capital gain of $25,000. Ordinarily, you’d take 50% of this amount – $12,500 – and declare that as your taxable income.

But say you sold another asset that same year and experienced a capital loss of $10,000. You can subtract $10,000 from $25,000 (to get $15,000) and cut the resulting amount in half, declaring this as your taxable income instead. Half of $15,000 is only $7,500, which means your income would be $5,000 less than if you had not experienced a capital loss – and less income means less taxes to pay.

Keep track of your assets, and consider selling off any that have declined in value. Doing so could provide a double benefit: you could improve your financial portfolio and decrease your tax bill at the same time.

2. Time the sale of your property for when your income is the lowest

Because the amount of capital gains tax charged is based on your income tax bracket (among other things) it’s smartest to time the sale of property for when your earnings are at their lowest so that your tax rate is lower. This could be if you or your spouse go on maternity leave or if you take a leave of absence from work, for example. The goal with this strategy is to sell your property in a year when your overall income is low to avoid paying higher tax o the asset.

3. Hold your future investments in tax-advantaged accounts

Canadian financial institutions offer a number of tax-advantaged accounts you can hold investments within.

With a Tax-Free Savings Accounts (TFSA), you don’t have to declare any gains you earn and can make tax-free withdrawals as well. There is a contribution limit that places a ceiling on the amount you can contribute to your TFSA each year, but the good news is that unused contributions roll over to future years. So, you won’t lose any opportunity to grow your money if you fail to use up your contribution room in a given year.

Another popular option is to hold your investments in a registered account like a Registered Retirement Savings Plans (RRSP). Such accounts often come with features such as tax-free contributions or withdrawals and the ability to treat your contributions as tax deductible. RRSPs, in particular, allow for tax-deductible contributions and tax-free growth as long as funds stay within the plan. The account is tax-deferred, so you only pay income tax when you withdraw money upon retirement when you withdraw.

4. Donate your property to causes you care about

If you have assets, such as property or corporate stocks, you can donate them to charity and use the donation to lower your capital gains tax. And if you donate assets that have grown in value since you first acquired them, you won’t be subject to capital gains tax on those assets.

So, if you just sold a $250,000 property that you originally bought for $195,000, you would normally have to count that $55,000 increase in property value as a capital gain. But if you donate the property to charity, you can avoid this and take home a large tax deduction instead.

On the other hand, if a property has lost some of its value but you still pass it on to keep it in the family, you can count the capital loss against your other income earnings.

Guide to property investment

Are there specific exemptions for certain types of property?

Yes. As mentioned above, your primary place of residence can be exempted from capital gains tax. If you own a farm or fishing property and sell either of these for a profit, the amount you profited is exempt from capital gains tax up to a lifetime limit of $1,000,000. This deduction is claimed on line 154 of your tax return.

Farm or fishing “property” that qualifies for exemption includes:

• Shares of the capital stock of a family-farm or fishing corporation owned by you, your spouse or your common-law partner.
• An interest in a family-farm or fishing partnership owned by you, your spouse or your common-law partner.
• Real property including land, buildings, and fishing vessels.
• Property included in capital cost allowance Class 14.1, such as milk and egg quotas, or fishing licenses.

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Bottom line

Knowing more about the intricacies of capital gains tax could line up your sale to maximize the profits you make on your home or investment property – and save a big headache at tax time.

Investing in property is worth it when you know what to look for and how to finance your real estate vision. To learn more about home financing including loan options, fees and terms, check out our guide to mortgages.

How to avoid capital gains tax on property in Canada FAQs

• If you sold your home for a profit, your capital gains would be considered "realized" because you cashed in on the increase in your home's value. However, if you had held on to the house instead of selling it, you wouldn't have made money on it even if its value has increased. Your capital gains would then be considered, "unrealized." You only have to pay tax on capital gains that are realized.

  To reference the example we used earlier, if you had bought a home years ago for $310,000 and it gained value until you sold it for $500,000, the gains would count as "unrealized" while you still owned the house and "realized" as soon as you sold the house and became $190,000 richer.

• If the house you are selling is your primary residence you do not have to pay tax on any proceeds from its sale, even if it has increased in value. If the house you're selling is not your primary residence, you have to pay capital gains tax on on 50% of any capital gains you realize, or the increase in value from its original purchase price. Learn more here.

• In order to avoid capital gains tax when selling your home, it needs to have been your primary residence for every year you owned it except for the year that you moved to a new primary residence.

• Yes. How you intend to use your profits doesn’t factor into the calculations of your taxable amounts after the sale. If you’ve made a profit, that profit is subject to capital gains tax.

• No. While the same rules apply to all gains and losses from real estate sales, the rate at which gains are taxed is ultimately based on the income tax bracket you fall into. This is because taxable capital gains are added into your income for the purpose of determining how much you tax you have to pay.

  Income tax has both a federal and provincial component that varies depending on which province/territory you live in. Income tax rates are also affected by how much you earn in a given year. Ultimately, the rate at which capital gains are taxed will vary from one person to another based on each individual's income and situation.

• You report your capital gains on line 127 of your income tax return. To support this amount, you must also complete and attach 5000-S3 Schedule 3 – Capital Gains (or Losses). Learn more in the T4037 Capital Gains guide on the Government of Canada website.

• Yes, capital losses can reduce the amount of capital gains, which in turn reduces the amount of taxable capital gains declared as part of your income. Capital losses can only be used to reduce capital gains down to zero – the reduction cannot result in a negative balance for which you receive a refund. See the discussion above for more details.

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