In today’s economy, real estate is one of the best ways to generate wealth and fund your retirement. But while asset appreciation has been enormous – according to the Canadian Real Estate Association (CREA), the average annual rate of return has been around 7-10% for residential properties and 8-12% for commercial properties over the past few decades – before purchasing an investment property, residential sellers should keep taxes top of mind and be asking themselves this crucial question: How much tax do you pay when you sell a house in Canada?
How Much Tax Do You Pay When You Sell a House in Canada?
One of the things that makes the Canadian real estate market so attractive to residential buyers is that you do not pay any taxes on the sale of a principal residence due to what’s known as the principal residence exemption for Canadian residents. As such, any profit you garner from selling your primary residence will not be taxed.
Because of the substantial growth that Canada’s housing sector experienced in the past two decades, many homeowners who bought and held their residential properties and sold recently will have enjoyed immense tax-free gains.
Of course, there are a few exceptions. Still, the fact that there is no capital gains tax when you are selling your home – be it a detached house in rural British Columbia or a condominium in the heart of Toronto – is appealing to many Canadians.
That said, here are taxes you might pay when selling your residential property in Canada.
Taxes on a Real Estate Sale
How much tax do you pay when you sell a house in Canada? Here are three taxes that may be levied on the sale of your property:
GST/HST
Are you selling a newly constructed or significantly renovated home? If so, you might be required to charge GST or HST on the sale. At the same time, if the property was your primary residence, you might be able to apply for a rebate of some or all the GST/HST paid. In addition, the size of the rebate will also depend on the sale price of your home and how much GST or HST was paid.
Ultimately, to determine if you are qualified, you must file a GST/HST New Housing Rebate Application with the Canada Revenue Agency (CRA) within two years of the sale date.
You should also know that even if the home you sell is your primary residence, there will be some GST/HST that needs to be paid.
Capital Gains Tax
Do You Have to Pay Capital Gains When You Sell Your House in Canada?
In the last few years, there has been discussion about introducing a capital gains tax on property values of at least $1 million to raise revenues for cash-strapped governments. The Canada Mortgage and Housing Corporation (CMHC) – Canada’s national housing agency, responsible for providing housing finance solutions for buyers and ensuring lenders have reliable access to mortgage funding – considered a 0.2-per-cent penalty on homes valued between $1 million and $1.5 million and up to 1% on residential properties valued above $2 million, back in 2022.
While research estimated that approximately 9% of Canadian homes would be affected (mainly in British Columbia and Ontario) and that it would generate as much as $5.83 billion that the federal government could apply to new housing starts, the idea has not resulted in new public policymaking at any level of government, thus far.
For now, while you do NOT need to pay a capital gains tax on the sale of your principal residence, the rules are different when it comes to the sale of a vacation home or a rental property. You can still apply for a partial capital gains exemption, but the calculations are a bit more intricate.
For “house flippers,” the likelihood of paying capital gains tax is high, unless you live in the property for at least a year. Property flipping involves purchasing real estate and holding it for a short period of time with the intention of reselling it for profit. Canada’s new Residential Flipped Property Rule was enacted at the end of 2022 in response to the government’s concern that many individuals who were engaged in property flipping were inappropriately reporting the profits as a capital gain and, in some cases, also claiming the principal residence exemption.
Under the new Flipped Property Rule, a gain from the disposition of a residential property in Canada (after January 1, 2023) that was owned for less than 365 days is considered fully taxable as business income. The purchase of a pre-construction condo also falls under this rule, meaning that where the sale of the pre-purchase right occurs within 365 days, the gain on the disposition would also be considered business income.
Gains from such dispositions are not eligible for the 50-per-cent capital gains inclusion rate or the principal residence exemption.
Various expenses incurred to earn your profit would be tax deductible, but any resulting loss would be denied and CANNOT be claimed as a business loss.
If the sale of the property is due to certain life events such as a death, disability, marital breakdown, the addition of family members, work relocation, involuntary termination of employment, insolvency, destruction or expropriation of the property – an exception to the rule may be granted.
However, the CRA has also increased compliance efforts in areas where speculative activity has increased, so if you’ve purchased and disposed of residential property in Canada, you should be prepared to support your tax filing.
Remember to maintain documentation no matter what your claim, even if you’ve held the property for over 365 days before selling it.
During an audit, the CRA may request the following:
- Agreements, such as the offer to purchase, contract of purchase and deed of sale
- The mortgage contract
- Any property appraisals
- Subdivision plans where a large property is subdivided into smaller lots
- Zoning applications
- Listing agreements from applicable real estate agencies
- Any statement of adjustments prepared by a lawyer
Property Tax
Generally, property taxes are paid on a pro-rated basis. This means that you will be required to pay a part of the property taxes for the year of the sale.
Taxes for Non-Canadian Resident Owners Selling a Home
The tax implications are slightly different for non-Canadian resident owners or individuals who are Canadian citizens but do not reside in the country.
There are several aspects that non-resident owners must be aware of when selling a property:
You must apply for a Clearance Certificate.
A non-resident withholding tax of 25% of the home’s gross sales price will be applied until you complete and pay your income tax return (this jumps to 50% if it is a rental property)
You’ll need to file a Section 216 return to confirm that you have reported rental income and paid taxes (this is if the property has been rented out).
You’ll need to submit a Canadian tax return for the year of the sale.
Assistance When Selling a Home is Important
The taxes you’re responsible for are in addition to the myriad of other real estate-related fees you will inevitably have to pay, such as mortgage discharge fees, moving costs, legal expenses, etc.
When you are selling your home, it is imperative to seek the assistance of tax professionals, legal experts, and experienced real estate agents to ensure that you are fully informed about all the fees you’ll need to pay upon selling your home. Remember, the taxes and fees you must pay will depend on a broad array of factors, such as the sale price, the property’s location, and whether it is your primary or investment property.
Yes, real estate can be a wealth generator. However, you also need to be aware of the tax implications.
As the saying goes, it is better to be safe than sorry.
**This article is not intended as legal or accounting advice. We recommend obtaining the guidance of a qualified accountant when determining taxes paid when selling a house in Canada.
