Capital gains tax in Canada applies when you sell an asset that has increased in value, including property. The Canada Revenue Agency (CRA) taxes the profit made on the sale of real estate and certain investments. However, not all property sales are subject to capital gains tax, and there are legal ways to reduce or avoid it entirely.
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How Capital Gains Tax Works in Canada
When you sell a capital asset, the CRA taxes only a portion of the profit, known as the capital gain. Unlike regular income, where the entire amount is taxed, capital gains are taxed at an “inclusion rate.”
Inclusion Rates for Capital Gains Tax in 2025
- Personal capital gains under $250,000: 50% inclusion rate
- Personal capital gains over $250,000: 66.67% inclusion rate
- Corporations: 66.67% inclusion rate
This means only half (or two-thirds for higher amounts) of the capital gain is taxed at your marginal tax rate.
Canada Capital Gains Tax 2025-2026: Major Changes, New Rates & What It Means for You
When You Can Avoid Paying Capital Gains Tax on Property
Primary Residence Exemption
If the property you’re selling is your principal residence, you don’t have to pay capital gains tax on any profit made. To qualify, the home must meet the “ordinarily inhabited” rule, meaning you must have lived there regularly. There is no set minimum time required to establish a home as your primary residence.
Inherited Property & Capital Gains
In Canada, there is no inheritance tax, but capital gains may still apply. If you inherit a property that was the deceased’s primary residence, there is no capital gains tax. However, if it was a secondary property, the estate must pay capital gains tax based on its fair market value at the time of death.
Ways to Reduce or Defer Capital Gains Tax
1. Sell When Your Income Is Lower
Since capital gains are taxed at your marginal rate, selling during a year when your income is lower can reduce the tax owed. Here are the 2025 federal tax brackets:
| Taxable Income | Marginal Tax Rate |
|---|---|
| $0 – $57,375 | 15% |
| $57,375 – $114,750 | 20.5% |
| $114,750 – $177,882 | 26% |
| $177,882 – $253,414 | 29.32% |
| Over $253,414 | 33% |
2. Offset Gains with Capital Losses
If you have capital losses from selling other assets, you can use them to reduce your taxable capital gains. You can also carry losses back three years or forward indefinitely to offset future gains.
3. Keep Track of Property Expenses
Certain expenses related to the sale of a property can reduce your taxable capital gain, including:
- Renovation and repair costs
- Realtor and broker commissions
- Legal fees
- Transfer taxes
- Advertising costs
4. Utilize the Lifetime Capital Gains Exemption
While not available for personal property, business owners, farmers, and fishers can benefit from this exemption to avoid paying capital gains tax on eligible assets.
5. Use Capital Gains Reserves
If you sell a property and receive payments over multiple years, you can defer the tax burden by claiming a capital gains reserve. This allows you to report only a portion of the gain each year.
6. Invest in Tax-Sheltered Accounts
While tax-sheltered accounts like RRSPs and TFSAs don’t apply directly to property sales, you can invest capital gains into these accounts to reduce overall tax liability.
Capital Gains on a $100,000 Property Sale
If you sell a secondary property and make a $100,000 profit, your taxable capital gain is:
- At a 50% inclusion rate: $50,000
- At a 66.67% inclusion rate (for higher earners): $66,670
Your final tax amount depends on your tax bracket. For example:
| Annual Income | Taxable Gain | Tax Owed |
| $55,000 | $50,000 | $7,500 |
| $75,000 | $50,000 | $12,219 |
| $120,000 | $50,000 | $21,733 |
Risks of Not Reporting Capital Gains
Failing to report capital gains can result in penalties, interest, and even charges of tax evasion. The CRA has strict rules for property sales and can investigate undeclared income.
Realized vs. Unrealized Capital Gains
- Realized Gains: You have sold the asset and made a profit. Taxes apply.
- Unrealized Gains: Your property has increased in value, but you haven’t sold it yet. No taxes apply until you sell.
Conclusion
While capital gains tax is a reality for many property owners in Canada, there are several legal strategies to reduce or avoid paying it. Understanding the primary residence exemption, using tax shelters, tracking deductible expenses, and offsetting gains with losses can significantly lower your tax burden. Consulting a tax professional can help you navigate the best approach for your specific situation.
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