Capital Gains and Selling Your Principal Residence in Ontario

Do you pay tax when you sell your home in Canada?

Often not. The Canada Revenue Agency says that if a property was solely your principal residence for every year you owned it, you do not pay tax on the gain (CRA, principal residence and other real estate). The rule is federal, so it works the same way in every province. Ontario's separate costs of selling, such as commission and legal fees, are covered in the net proceeds guide, and Ontario has no land transfer tax on the seller.

The answer gets less simple when any of the following are true: you owned the home for years during which it was not your principal residence, part of the home earned income, you owned another property in the same years, or you owned the home for under a year. Each is covered below. The site gives general information and not tax advice, and an accountant who has your full history is the right person to confirm your numbers.

How the principal residence exemption works

A capital gain is the difference between what a property sold for and what it cost you, after adjustments. For most property, a share of that gain is taxable. A home you designate as your principal residence for the years you owned it is exempt. The CRA's page sets out the designation rules, and the key points are these.

• If the property was solely your principal residence for every year you owned it, the gain is not taxed.
• Only one home per family unit can be designated as a principal residence for any year. This has applied since 1982.
• A "plus one" rule can cover both the home you sell and the home you buy in the same year.

The practical effect is that couples who own a house and a cottage need to think about which one is designated for which years. A gain on the second property may be partly taxable. If you are in that position, the question deserves an accountant's time before you list either property.

This site deliberately does not cite section numbers of the Income Tax Act for these rules, because they were not confirmed on a page read for this guide. Quote the CRA pages when you discuss the rules with your preparer.

Why you must report the sale of your principal residence

Since the 2016 tax year, the CRA allows the exemption only if you report the sale and designation on your tax return. You do this with Schedule 3 and Form T2091(IND), and the CRA's guidance says page 1 of the form is used when the property was your principal residence for all years or all but one year (CRA, reporting the sale of your principal residence).

Many owners assume a tax-free sale needs no paperwork. It does. File the forms with the return for the year the sale closes, not the year you listed or accepted an offer, and keep records of when you bought, what you paid, major improvements and the sale. A lawyer's reporting letter and the closing statement will help, and so will the original purchase documents.

If you are selling for an estate, the same reporting duty exists. The CRA treats a person who has died as having sold all property just before death at fair market value. A home may qualify for the exemption, but the designation forms must still be filed with the final return, and a spousal rollover is available if the property passes to a resident spouse or common-law partner (CRA, capital gains on a final return). The guide to helping a parent sell their home covers the practical side.

The home flipping rule for sales within 365 days

Owners who sell soon after buying should know about the flipping rule. Under it, a housing unit owned for fewer than 365 consecutive days before the sale is treated as flipped property. The profit is deemed to be business income, which is fully taxable, and the principal residence exemption does not apply. This applies to sales on or after January 1, 2023 (same CRA principal residence page).

There are exceptions for life events. The CRA lists death, a change in the family, relocation, illness, job loss and destruction of the property, among others. Downsizers rarely hit this rule, since they have usually owned for much longer. It matters if you bought a smaller home, found it did not suit you and want to sell within the year, or if you are buying a home from a builder and selling again quickly. In those cases ask your accountant about the exceptions before you list.

The Income Tax Act section for this rule was not confirmed for this guide, so none is cited here. The CRA page above is the reference to use.

Selling a home with a rental unit or home office

If part of your home earned income, such as a rented basement or a space used for a business, the CRA says you split the sale price in proportion and report the gain on the part that earned income on Schedule 3. If you converted the home to a rental at some point, you could elect to avoid a deemed disposition at the time of the change (same CRA page).

An older Ontario house with a basement apartment is common among people thinking about downsizing. If that describes yours, collect the history before you speak to the preparer: when the unit was first rented, who rented it, how much was reported as income and what you spent on the unit. The answer will shape the tax, and a short list of dates saves time.

If you are renovating a house to bring a relative in, rather than selling, the federal Multigenerational Home Renovation Tax Credit is worth knowing about. It is refundable, at 14.5% of up to $50,000 per qualifying renovation, for a maximum of $7,250 per claim, for a self-contained secondary unit for a senior or disabled adult relative, based on the CRA page for the 2025 tax year (CRA, line 45355). The aging in place or moving guide considers that choice.

The capital gains inclusion rate in 2026

For gains that are not exempt, such as on a rental property, a second home or a cottage, only part of the gain is added to income. That part is the inclusion rate, and it is one-half, or 50%. A proposed increase to two-thirds was cancelled by the Prime Minister on March 21, 2025 (Prime Minister of Canada). A CRA tax tip from January 2025 still describes the increase as deferred to January 1, 2026. That page is superseded.

A simple illustration, using made-up numbers: a taxable capital gain of $100,000 would add $50,000 to your income in the year of the sale. The tax on that depends on your total income and your marginal rate. None of this applies to a fully exempt principal residence, which is why the inclusion rate matters mainly to owners with a second property.

What to do before you list

A short checklist helps owners who are likely to have a fully exempt gain and those who are not.

• List every property you or your spouse or common-law partner owned in each year of ownership.
• Confirm which property was designated as the principal residence in each year.
• Note any years in which part of the home was rented or used for a business.
• Check how long you have owned the home, particularly if it is under a year.
• Ask the accountant who prepares your return to complete Schedule 3 and Form T2091(IND).
• Keep the closing documents and your purchase records for as long as the CRA's rules require, and ask your preparer how long that is.

Income from investing the proceeds is a separate matter. Interest and other investment income generally counts as income in a way that an exempt home sale does not. Whether a home sale affects an income-tested benefit such as the Guaranteed Income Supplement was not confirmed from an official page for this guide, so confirm with Service Canada before relying on any rule you hear.

Timing matters for the paperwork too. The return that reports the sale is filed in the spring after the year of closing, which can be many months after the money arrives. Set aside a note for yourself, or tell your accountant at the time of the sale, so the forms are not forgotten. If you move provinces after selling, the federal rules for the exemption stay the same, though your provincial return changes.

Related costs and next steps

The tax on the gain is only one cost. The full picture of a sale is in the net proceeds guide, and on the purchase side the land transfer tax guide shows what you will pay as a buyer. Seniors may also qualify for property tax relief and other credits, which the costs and money page and the resources page point to. The calculator gives a quick estimate.

When you want to start a conversation about selling, contact us to an agent. Messages go to agents on the operating team at eXp Realty. The agent can explain how a sale works, but questions about tax belong with your accountant.