Rental, Investment & Tax
Capital Gains on a Second Property in Canada
Capital gains on a second property in Canada: how the taxable gain is calculated, what the principal residence exemption does not cover, and when the tax is due.
Capital gains second property rules in Canada mean you're taxed on only a portion of the profit when you sell. The taxable capital gain is generally 50% of the gain, added to your income and taxed at your marginal rate. The principal residence exemption does not apply unless you designate it as your principal residence for specific years. If you're selling a second property, you'll need to calculate the gain and report it to the CRA.
What Is a Second Property for Tax Purposes?
A second property is any property you own that is not your principal residence. That includes a rental property, a cottage, a vacation home, or raw land. When you sell it for more than your adjusted cost base (ACB), you have a capital gain. If you sell for less, you have a capital loss. The CRA treats the sale as a disposition, and you must report it. If you rent out the property, you also report rental income and expenses each year, separate from the capital gain on sale. For how lenders treat rental income, see Counting Rental Income for Mortgage Qualification.
How Capital Gains on a Second Property Are Calculated
Your capital gain is the difference between the proceeds of disposition and the total of your ACB and any outlays or expenses related to the sale. The ACB includes the purchase price, capital improvements, legal fees, and land transfer tax. Outlays include real estate commissions, legal fees, and advertising costs. Capital improvements are costs that add value to the property, like a new roof, an addition, or a finished basement. Routine repairs, like painting or fixing a leak, are not added to the ACB; they are deducted from rental income if the property is rented.
Once you have your capital gain, you include a portion of it in your income. The inclusion rate is currently 50% for individuals, but confirm the current rate with the CRA. Your taxable capital gain is then taxed at your marginal tax rate. For example, if your marginal rate is 40%, the effective tax rate on the gain is 20% (50% inclusion × 40% marginal rate). If you have a capital loss, you can use it to offset capital gains in the same year, carry it back three years, or carry it forward indefinitely. You cannot use a capital loss against other income.
If the property was a rental, any capital cost allowance (CCA) you claimed is recaptured and added to your income as fully taxable income, not as a capital gain. This can significantly increase your tax bill on sale.
The ACB also includes legal fees for the purchase and any capital improvements made over the years. If you inherited the property, the ACB is usually the fair market value at the date of death. If you received it as a gift, the ACB is generally the fair market value at the time of the gift. Keep all receipts and documents to support your ACB.
| Item | Principal Residence | Second Property |
|---|---|---|
| Capital gains tax | May be exempt via the principal residence exemption | Taxable on the inclusion rate (currently 50%) |
| Reporting | Must report sale and designate the property | Must report the capital gain on Schedule 3 |
| CCA recapture | Not applicable | Fully taxable if CCA was claimed |
| CMHC mortgage default insurance | Available if you have less than 20% down | Typically not available; 20% down required |
Reporting and Paying the Tax
You report the sale of a second property on Schedule 3 of your personal tax return for the year of the sale. The tax you owe is due by April 30 of the following year. If you expect a large capital gain, you may need to pay instalments to avoid interest. It's wise to set aside funds for the tax bill right after the sale closes. You should keep all records of the purchase, improvements, and sale for at least six years. If you are designating the property as a principal residence for some years, you must file Form T2091. For a second property, you simply report the gain.
The CRA requires you to report the sale even if you don't owe tax. If you fail to report, you may face penalties and interest. The CRA can reassess you beyond the normal reassessment period if you fail to report a sale of a property.
The Principal Residence Exemption and Second Properties
The principal residence exemption (PRE) can eliminate or reduce capital gains tax on your principal residence. You can designate only one property per year as your principal residence for each family unit. If you own a second property, you generally cannot claim the PRE for it. However, if you lived in the second property for some years, you might be able to designate it for those years, but you would then give up the PRE on your main home for those same years. The PRE formula uses the number of years you designated the property plus one, divided by the number of years you owned it. For details, see The Principal Residence Exemption in Canada.
Mortgage Qualification When You Own a Second Property
Buying a second property usually requires a mortgage. Lenders must follow OSFI Guideline B-20, which includes the federal mortgage stress test. You must qualify at the higher of your contract rate plus two percentage points or the published qualifying-rate floor. Confirm the current floor with OSFI or your lender. Lenders also look at your GDS and TDS ratios, which include the new mortgage payment, property taxes, and heating costs. Rental income can be used, but typically only 50% of gross rents are counted. See Counting Rental Income for Mortgage Qualification. Because CMHC mortgage default insurance is generally not available for investment properties, you'll need at least 20% down. The Bank of Canada policy rate influences the prime rate and variable mortgage rates, which affect your payments. For more, see The Canadian Mortgage Stress Test, Explained and GDS and TDS Ratios: How Lenders Measure Affordability. Note that the First Home Savings Account (FHSA) and RRSP Home Buyers' Plan are only for first-time home buyers, so they generally don't apply to a second property.
Lenders will also consider your total debt load, including credit cards, car loans, and any other mortgages. The stress test ensures you can still afford payments if rates rise. If you are buying the second property with a co-borrower, both incomes and debts are considered.
Planning Ahead: Reducing the Tax Bite
You can reduce your capital gain by tracking all capital improvements and eligible selling costs. Keep every receipt. If you convert your principal residence into a rental, you can make an election under the Income Tax Act to defer the deemed disposition, but you must meet certain conditions. Consider the timing of the sale. If you have a capital loss from another investment, it could offset the gain. When you buy a second property, you'll pay land transfer tax (or its provincial equivalent). If you break an existing mortgage to buy the second property, you may face an interest rate differential (IRD) penalty. Always consult a tax professional for advice specific to your situation.
If you plan to sell the property in the future, factor in the capital gains tax when estimating your net proceeds. If you are buying a second property, budget for land transfer tax, legal fees, and the stress test. If you need to break a mortgage, get an IRD penalty quote from your lender first.
Key Takeaways
- Capital gains on a second property are taxed on the inclusion rate (currently 50%) and added to your income.
- Your ACB includes the purchase price, capital improvements, and buying costs.
- The principal residence exemption does not apply to a second property unless you designate it for specific years.
- Report the sale on Schedule 3 and pay the tax by April 30 of the following year.
- Mortgage qualification for a second property involves the stress test, GDS/TDS ratios, and often a 20% down payment.
Frequently asked questions
Do I have to pay capital gains tax when I sell my second property in Canada?
Yes, when you sell a second property, you must report the capital gain on your tax return. Only a portion of the gain—currently 50%—is included in your income, and that amount is taxed at your marginal rate. If you lived in the property as your principal residence for some years, you may be able to reduce the gain using the principal residence exemption. Consult the CRA for current rules.
How is the capital gain calculated on a second property?
Your capital gain is the proceeds of sale minus your adjusted cost base (ACB) and selling costs. The ACB includes the purchase price, capital improvements, and buying costs like legal fees and land transfer tax. Selling costs include real estate commissions and legal fees. The resulting gain is then multiplied by the inclusion rate (currently 50%) to get the taxable capital gain.
Can I avoid capital gains tax on a second property if I live in it part-time?
You generally cannot avoid the tax just by living there part-time. The principal residence exemption applies to your principal residence, and you can designate only one property per year. However, if you lived in the second property as your main home for certain years, you might designate it for those years. That would reduce the gain but could affect the exemption on your other home. Get professional tax advice.
What is the capital gains inclusion rate in Canada?
The inclusion rate is the portion of a capital gain that is added to your income and taxed. For individuals, the inclusion rate is currently 50%. This means half of the gain is taxable, and half is tax-free. The rate can change, so confirm the current inclusion rate with the CRA or a tax professional before you file.