By Bronte Bay CPA Professional Corporation    ·  10 min read

Short answer: Capital gains on Canadian real estate are taxed at a 50% inclusion rate in 2026 — the proposed increase to 66.67% was cancelled by PM Carney on March 21, 2025 and was never enacted into law. For a top-bracket Ontario resident, this means an effective capital gains tax rate of approximately 26.76%. The principal residence exemption can eliminate the tax entirely on your home. Rental properties, cottages, and investment properties do not qualify for the PRE — and properties sold within 365 days of purchase face the full tax as 100% business income, not a capital gain. This guide covers every scenario Canadian real estate owners face in 2026.

Canadian real estate owners — whether they own a principal residence, a rental property, a cottage, a commercial building, or a condo they flipped — face capital gains tax when they sell at a profit. The rules governing how much tax you pay, whether any exemptions apply, and how the gain is calculated are specific, consequential, and frequently misunderstood.

2024 and early 2025 created significant confusion for Canadian real estate investors — the federal government proposed raising the capital gains inclusion rate from 50% to 66.67%, then deferred it, then cancelled it entirely. For 2026, the rules are finally clear. This guide covers everything Canadian real estate owners need to know.

The Capital Gains Inclusion Rate in 2026 — What Actually Happened

The Canadian capital gains landscape went through more proposed change between April 2024 and March 2025 than in the prior two decades combined — and ended up almost exactly where it started. Here is the complete timeline:

• April 2024 — the 2024 Federal Budget proposed raising the capital gains inclusion rate from 50% to 66.67% for individuals on gains above $250,000 annually, and on all corporate and trust capital gains, effective June 25, 2024
• June–December 2024 — CRA attempted to administer the higher rate despite no legislation being passed; court challenges launched
• January 31, 2025 — Finance deferred the effective date to January 1, 2026; CRA reverted to the 50% rate for all 2024 gains
• March 21, 2025 — PM Mark Carney cancelled the proposed increase entirely; the 66.67% rate will not take effect
• Fall 2025 — Budget 2025 formally confirmed the cancellation; LCGE indexed to $1,275,000 for 2026
• 2026 — capital gains inclusion rate is 50% — confirmed, legislated, unchanged from prior years

📋 CPA Note: If you delayed a property sale in 2024 or early 2025 to avoid the proposed higher inclusion rate — you did not need to. The rate was cancelled. However, if you accelerated a sale before June 25, 2024 specifically to lock in the 50% rate on what you expected would become a 66.67% regime, you may have crystallized gains earlier than optimal. Bronte Bay reviews the tax impact of disposition timing decisions for all real estate investor clients as part of annual planning.

How Capital Gains on Real Estate Are Calculated in Canada

The formula for calculating a capital gain on real estate in Canada has three components:

Proceeds of Disposition

The proceeds of disposition is the amount you received for the property — typically the sale price. For most arm’s length transactions, this is straightforward. For non-arm’s length transactions (selling to a family member or related party), the CRA deems the proceeds to be the fair market value of the property at the time of sale, regardless of the actual price paid — preventing artificial undervaluation to minimize the gain.

Adjusted Cost Base (ACB) — What You Can Add

The adjusted cost base (ACB) is your cost of the property for tax purposes. A higher ACB means a smaller capital gain and less tax. For real estate, the ACB includes everything you paid to acquire and improve the property:

• Original purchase price
• Land transfer tax paid on purchase (Ontario: up to 2.5% on residential, plus Toronto Municipal Land Transfer Tax of up to 3.5%; BC: Property Transfer Tax up to 3%)
• Legal fees on purchase
• Real estate commission on purchase (if applicable)
• Capital improvements — additions, renovations, or upgrades that extend the useful life of the property or add a new component (new roof, addition, finished basement, new HVAC system). Routine repairs and maintenance are not added to ACB — they are either deductible as rental expenses (for investment properties) or non-deductible (for personal use)
• Survey costs and other acquisition expenses
• GST/HST paid on purchase where not recoverable as an ITC

Selling Costs

Costs of disposition reduce the capital gain directly:

• Real estate commission paid to the selling agent
• Legal fees on sale
• Mortgage discharge fees and penalties
• Staging costs directly related to the sale

Example — Calculating a Capital Gain on a Toronto Rental Property

The Principal Residence Exemption (PRE) — How It Works in 2026

The principal residence exemption (PRE) under paragraph 40(2)(b) of the Income Tax Act is the most valuable tax shelter available to Canadian homeowners. When properly applied, it can eliminate 100% of the capital gains tax on the sale of a qualifying home — regardless of the size of the gain.

PRE Qualification Requirements

• You must have “ordinarily inhabited” the property — living in it as your home, not just owning it. A property you rented out for the entire ownership period does not qualify.
• Only one principal residence per family unit per year — you, your spouse, and your minor children can collectively designate only one property as a principal residence for any given calendar year
• You must designate it — the PRE is not automatic. You elect to designate a property as your principal residence for specific years on Schedule 3 and Form T2091 when you file your T1 return in the year of sale
• Canadian residents only — non-residents of Canada cannot claim the PRE on dispositions occurring after October 2, 2016

The PRE Formula — Partial Exemptions

If you did not live in the property for all years of ownership — for example, if you rented it for several years before moving in — you receive a partial PRE based on the number of years you designate it as your principal residence:

Critical: You Must Still Report the Sale

Even when the full PRE eliminates all tax owing on the sale of your home, you must still report the sale on your T1 return using Schedule 3. The CRA requires disclosure of all principal residence dispositions. Failing to report — even when no tax is owing — can result in CRA penalties and may jeopardize the PRE designation retroactively. This is the most common mistake Bronte Bay sees Canadian homeowners make.

Property Flipping Rules — When a “Capital Gain” Becomes Business Income

The Residential Property Flipping Rule, effective for dispositions on or after January 1, 2023, fundamentally changed the tax treatment of short-term property sales in Canada. If you sell a residential property — including a rental property, condo, or cottage — within 365 days of purchasing it, the profit is treated as 100% business income, not a capital gain. This means:

• The 50% inclusion rate does not apply — 100% of the profit is taxable income
• The principal residence exemption is not available — even if you lived in the property
• The full profit is added to your income and taxed at your marginal personal rate (up to 53.53% in Ontario, 53.50% in BC)
• Losses from flipping are denied — you cannot claim a loss if the property sells below cost within 365 days

Exceptions — Life Events That Exempt You From the Flipping Rule

The CRA provides specific exclusions where a sale within 365 days will still be treated as a capital gain (not business income) if caused by certain life events:

• Death — of the taxpayer or a related person
• Household addition — birth or adoption of a child; related person moving in to receive care
• Separation or divorce — breakdown of marriage or common-law partnership
• Personal safety — threat to you or a related person
• Serious illness or disability — of you or a related person
• Job relocation — at least 40km closer to a new work location (must be eligible for the moving expense deduction)
• Involuntary disposition — expropriation, destruction, or condemnation of the property
• Insolvency — inability to pay mortgage or other debts

📋 CPA Note: The flipping rule applies based on the date of purchase and the date of closing on the sale — not the date you listed the property. A property purchased May 1, 2025 and sold (closed) April 15, 2026 triggers the rule (349 days). A property purchased May 1, 2025 with closing May 5, 2026 is outside the 365-day window. Timing the closing date deliberately to clear 365 days is legitimate tax planning — but must be genuine and documented. The CRA is actively auditing short-term property transactions and has access to land title transfer data.

Effective Capital Gains Tax Rates by Province — 2026

Because capital gains are taxed at your personal marginal rate on 50% of the gain, the effective tax rate depends on your province of residence and your total income in the year of sale. For Canadian real estate investors selling a significant property, the capital gain will often push you into the top marginal bracket. Here are the 2026 effective capital gains rates for top-bracket taxpayers in Canada’s major provinces:

The effective capital gains rate applies only to income in the top bracket. If your total income in the sale year (including the taxable capital gain) falls across multiple brackets, the blended rate will be lower. This is why timing a property sale to a lower-income year — or splitting proceeds across two calendar years using a year-end closing — is one of the most effective capital gains planning strategies available.

Rental Properties — Capital Gains and CCA Recapture

Selling a rental property triggers not only a capital gain but potentially Capital Cost Allowance (CCA) recapture — two separate and often misunderstood components of the tax bill on a rental property sale.

Capital Gain on the Property

The capital gain on the rental property is calculated as proceeds minus ACB minus selling costs, and taxed at the 50% inclusion rate — same as any other non-principal residence property. The ACB includes the original purchase price plus land transfer taxes, legal fees, and capital improvements. Routine repair and maintenance expenses deducted against rental income during the ownership period are not added to the ACB.

CCA Recapture — The Forgotten Tax

If you claimed Capital Cost Allowance (CCA) on the building portion of the rental property during your ownership — a legitimate deduction available on Form T776 — the CRA recaptures those deductions when you sell. CCA recapture is taxed as 100% income — not at the 50% capital gains inclusion rate. This is often a significant and surprising component of the tax bill on a rental property sale.

Change of Use — Moving Into or Out of a Rental Property

A change of use of a property — converting a rental property to personal use, or converting your home into a rental — is a deemed disposition at fair market value for tax purposes, even though no actual sale occurs. This can trigger an immediate capital gain and CCA recapture. Elections are available to defer the deemed disposition in some circumstances — but require timely filing with the CRA.

Real Estate Held in a Corporation — Capital Gains Tax Treatment

Many Canadian real estate investors hold properties inside a Canadian corporation — either for liability protection, estate planning, or income splitting. The capital gains tax treatment inside a corporation differs significantly from personal ownership:

• Corporate capital gains inclusion rate — also 50% in 2026 (the proposed corporate increase to 66.67% on all gains was also cancelled by PM Carney in March 2025)
• Corporate tax on the capital gain — the taxable capital gain (50% of the gain) is added to the corporation’s income and taxed at the passive income rate — approximately 50.17% in Ontario and 50.67% in BC. This is not the small business deduction rate
• Refundable Dividend Tax on Hand (RDTOH) — approximately 30.67% of the corporate capital gains tax paid is added to the RDTOH account. When the corporation pays taxable dividends to shareholders, the CRA refunds the RDTOH at $38.33 per $100 of dividend paid — partially recovering the high corporate rate
• Capital Dividend Account (CDA) — the non-taxable portion of a capital gain (50% of the gain) is added to the CDA. The corporation can distribute this amount as a capital dividend — completely tax-free to shareholders. This is one of the most valuable tax planning tools for corporations with capital gains
• No principal residence exemption — a corporation cannot claim the PRE regardless of whether the property is used as a residence

📋 CPA Note: The Capital Dividend Account (CDA) is one of the most underutilized tax planning tools for incorporated real estate investors. When a corporation sells a property and realizes a capital gain, the non-taxable 50% portion flows to the CDA immediately. Bronte Bay tracks the CDA balance for every incorporated real estate investor client and advises on the optimal timing to declare capital dividends — which can be significant on a major property sale.

Capital Losses on Real Estate — Using Them Strategically

If you sell a property at a loss — proceeds are less than ACB plus selling costs — you have an allowable capital loss. The allowable capital loss is 50% of the loss (same inclusion rate as gains). Capital losses have specific rules in Canada:

• Capital losses can only offset capital gains — you cannot deduct a capital loss against employment income, rental income, or business income
• Carry-back 3 years — an allowable capital loss in 2026 can be carried back to offset capital gains in 2023, 2024, or 2025, generating a tax refund for those prior years
• Carry-forward indefinitely — losses not used in the current or prior years carry forward indefinitely until you have capital gains to offset them
• Personal-use property — losses on personal-use property (your principal residence, cottage used primarily for personal enjoyment) are generally not deductible
• Terminal loss on rental buildings — if the undepreciated capital cost (UCC) of the rental building exceeds the proceeds on sale, the excess is a terminal loss — deductible as regular income, not restricted to capital gains

Non-Residents Selling Canadian Real Estate — Withholding Tax and Section 116

Non-residents of Canada selling Canadian real estate face specific withholding tax obligations under Section 116 of the Income Tax Act:

• The purchaser is required to withhold 25% of the gross purchase price (not the gain — the full price) and remit it to the CRA unless the non-resident vendor obtains a Certificate of Compliance from the CRA before or within 30 days of closing
• To obtain a Certificate of Compliance, the non-resident must file a Section 116 notification and either pay the estimated capital gains tax or provide acceptable security
• Non-residents must also file a Canadian T1 return for the year of disposition to report the actual capital gain and recover any over-withholding
• For Toronto and Vancouver properties — additional municipal and provincial measures apply including the Non-Resident Speculation Tax (NRST) in Ontario (25% on residential property purchases) and the Foreign Buyers Tax in BC (20%). These apply on purchase, not on the capital gain at sale.

8 Capital Gains Tax Planning Strategies for Canadian Real Estate Owners

1. Maximize your ACB — keep receipts for every capital improvement made during ownership. A kitchen renovation, new roof, finished basement, or addition all increase your ACB and reduce your capital gain. Maintenance and repairs do not qualify — but capital improvements do. The difference between a well-documented ACB and a poorly documented one can be tens of thousands of dollars.
2. Time the closing date — if you are close to the end of a calendar year, consider whether closing in January rather than December pushes the capital gain income into a lower-income year. The capital gain is reported in the year the property closes — not the year you list it or sign the agreement.
3. Spread income across spouses — if your spouse has lower income than you, holding the property jointly or structuring the ownership to give your spouse a larger share can reduce the blended marginal rate on the gain at sale. Attribution rules apply — this planning must be done at the time of acquisition, not retroactively.
4. Carry back losses — if you have realized capital losses in other investments in 2026, they offset capital gains on real estate sales in the same year. If the losses exceed your 2026 gains, the excess can be carried back 3 years to offset 2023–2025 gains and generate refunds.
5. Use the capital dividend account (CDA) — if the property is held in a corporation, declare a capital dividend from the CDA for the non-taxable 50% of the gain as soon as possible after the sale. Capital dividends are tax-free to shareholders and should not be deferred unnecessarily.
6. Plan the sale year holistically — the capital gain is added to all your other income in the sale year. If you are expecting other high-income events in 2026 (bonus, RRSP conversion, other asset sale), consider deferring the property sale to 2027 to avoid stacking income in the same year.
7. Ensure PRE designation is maximized — if you have owned more than one property during the same years, Bronte Bay reviews which years to designate each property as your principal residence to maximize the overall PRE shelter across your portfolio.
8. Document the flipping rule exclusion — if you sell within 365 days due to a qualifying life event, document it thoroughly — medical records, employment transfer letters, legal separation documents. The CRA will request evidence; the documentation must exist before the audit.

Frequently Asked Questions

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