Capital Gains

Capital gains are the profit from selling a property that is not your principal residence — for example a rental, a second home, or an investment property — for more than it cost you. In Canada, only a portion of the gain, called the inclusion rate, is added to your taxable income and taxed at your marginal rate; the remainder is received tax-free. The Canada Revenue Agency (CRA) expects the gain to be reported on your return for the year of the sale.

How a capital gain is calculated

Generally, the gain is the proceeds of disposition minus the adjusted cost base, minus eligible outlays and expenses.

• Proceeds of disposition: the sale price, including any mortgage the buyer assumes.
• Adjusted cost base: the purchase price plus capital costs such as major renovations and buying costs like land transfer tax and legal fees.
• Outlays and expenses: selling costs such as realtor commission, legal fees, and advertising.

A negative result is a capital loss. Capital losses generally cannot offset employment income, but they can be applied against capital gains, subject to CRA rules.

Why capital gains matter to a mortgage

Two ways. First, income. If you qualify using rental or investment income, an underwriter will review your CRA notices of assessment and tax returns and may apply an add-back or gross-up, because only the taxable portion of a gain counts. See rental income qualification.

Second, cash. Tax reduces the proceeds you keep when a property sells. If you plan to sell a rental and move the equity into another purchase, the tax owing belongs in your down payment math, alongside the mortgage payout and selling costs.

Principal residence versus other property

The principal residence exemption can shelter the gain on a home you ordinarily inhabit, so many owners pay no tax when they sell their main home. It does not cover a rental, an investment property, or a property you never lived in. The sale of a principal residence must still be reported, and a home used partly for business or rented out may qualify only for a partial exemption. Tax on a taxable gain is generally due with your return for the year of sale, not on closing day, so plan to set funds aside.