Canada Capital Gains Tax and the Principal Residence Exemption

Canada capital gains tax is not a separate tax. When you sell shares, a rental property, a cottage or another capital asset for more than it cost, a share of the gain is added to your income and taxed at your normal federal and provincial rates. For 2025 and 2026, that share is one-half: the proposal to raise it to two-thirds was cancelled. This guide explains the inclusion rate, how to report gains, how the principal residence exemption works and what is different for newcomers, Americans and Indian-origin owners of property in two countries.

How does Canada capital gains tax work in 2025 and 2026?

A capital gain is the proceeds of disposition minus the adjusted cost base and the outlays and expenses of selling. The CRA's own example says that fifty percent of the capital gain is taxable. That half is the taxable capital gain, and it is added to income on line 12700. A capital loss works the same way in reverse: it reduces gains in the year, and a net capital loss can be applied to taxable capital gains of the three preceding years.

The government had proposed raising the inclusion rate from one-half to two-thirds on gains realized annually above $250,000 by individuals, and on all gains of corporations and most trusts. The start date was deferred to January 1, 2026, and then the Prime Minister announced on March 21, 2025 that the government would cancel the proposed increase. The CRA's 2025 pages continue to describe one-half, and a September 2026 federal release again refers to the cancelled increase. The same March 2025 announcement kept the higher lifetime capital gains exemption (LCGE) limit, which the CRA's line 25400 page shows as $1,250,000 for qualifying property, with a maximum deduction of $625,000. A later 2026 announcement refers to $1.275 million for eligible entrepreneurs, so confirm the figure for your sale date with your Canadian CPA.

How to report a capital gain: step by step

1. List each sale. For shares, funds, real estate or other capital property, record the date, proceeds, cost and selling costs.
2. Convert to Canadian dollars. Convert proceeds at the rate on the sale date, the adjusted cost base at the rate on the purchase date, and expenses at the rate on the day incurred. Report net results in Canadian dollars.
3. Complete Schedule 3. It determines whether you have a taxable capital gain or a net capital loss.
4. Carry the result to line 12700. If it is a gain, the taxable portion is included in income.
5. Claim any deduction. The capital gains deduction on line 25400 applies only to qualifying property such as qualified small business corporation shares or farm and fishing property.
6. Check other filings. Large gains can raise alternative minimum tax questions (Form T691), and foreign holdings may need the T1135.

How does the principal residence exemption work?

A home you owned and lived in can be exempt from tax on its gain. The CRA treats a house, cottage, condominium, apartment in a building or duplex, trailer, mobile home or houseboat as a possible principal residence, if you, your current or former spouse or common-law partner, or one of your children lived in it at some time during the year. Land is generally limited to half a hectare (1.24 acres) unless you can show more is needed to use and enjoy the home.

Key rules:

• One home per family per year. For 1982 and later years, only one home can be your family's principal residence for each year. For 1993 and later, the family is you, a spouse or common-law partner who was not separated for the whole year, and your children under 18 (other than a child who had a spouse or common-law partner).
• You must report the sale. If a property was at any time your principal residence, report the sale on Schedule 3 and Form T2091(IND). The CRA only allows the exemption if you report the disposition. Complete only page 1 of the form if the property was your principal residence for all years you owned it, or all years but one.
• The "plus one" rule. When you sell one home and buy another in the same year, both can be eligible for that year, but you must be resident in Canada in the year you buy.
• Residents only. The exemption is limited to tax years in which you were a resident of Canada and the property was your principal residence.
• Rented or business use. If income use is minor, there are no structural changes and no capital cost allowance is claimed, the whole property can keep its status. Otherwise you split the sale.
• Change in use. Converting a home to a rental is treated as a sale at fair market value unless an election under subsection 45(2) or 45(3) applies. A late designation may carry a penalty.

Special situations for newcomers and non-residents

When you become a resident, the CRA considers you to have sold and immediately reacquired most property at fair market value on that date. Keep records of values on arrival, because they become your cost. Our newcomer first-year guide shows how to document them.

A non-resident who sells taxable Canadian property, such as Canadian real property, must notify the CRA within 10 days of the disposition using Form T2062 or T2062A and request a certificate of compliance. Without it the buyer may withhold 25% of the proceeds (50% on certain property) and may become liable for the vendor's tax. A late notice carries a penalty of $25 a day, minimum $100 and maximum $2,500. See our non-resident guide.

Deadlines and penalties

A sale is reported on the return for the year of sale: April 30, 2026 for 2025 (June 15, 2026 if you or your spouse is self-employed), with any tax due April 30. A late designation of a principal residence may carry a penalty, and a non-resident vendor's section 116 notice is due within 10 days of the sale. The general late-filing penalty and interest are in our filing deadlines guide.

Worked examples

Investor in Mississauga. Anita sells shares for $50,000 that cost $30,000 and pays $200 in selling costs. The gain is $19,800 and the taxable capital gain is $9,900, which she adds to income and taxes at her marginal rate.

Calgary homeowner. The Patels bought a Calgary home in 2012 for $400,000 and sold it in 2025 for $700,000. They lived in it for every year and designate it for all years, so the $300,000 gain is exempt, but they still report the sale on Schedule 3 and Form T2091(IND).

Newcomer with an Indian flat. Sunil becomes a Canadian resident in 2025 owning a flat in Pune. Its fair market value on the day he became resident is the Canadian cost. If he sells later for $30,000 more than that value, Canada measures the gain from the arrival value, so $15,000 is the taxable capital gain. India may also tax the sale; the foreign tax credit rules decide the overlap.

If you also file in the U.S. or India

Canada's one-half inclusion and U.S. capital gains rates produce different tax on the same sale, and exchange rates change the gain in each currency. A U.S. citizen who sells a Toronto home reports the sale in both countries, applies separate home-sale rules in each and claims foreign tax credits. Indian rules for residents and non-residents differ again. Start with the capital gains comparison, U.S. citizens living in Canada and India capital gains for NRIs.

Mistakes to avoid

• Assuming an exempt home sale need not be reported. It must be.
• Designating two homes for the same year within one family unit.
• Using year-end exchange rates instead of the sale-date and purchase-date rates.
• Forgetting that the exemption does not cover years of non-residence.
• Selling Canadian real estate as a non-resident without a certificate of compliance.

How we can help

We are a U.S. CPA firm in Aurora, Illinois. We calculate the U.S. side of a Canadian sale, including gain in U.S. dollars, foreign tax credits and any exclusion, and we coordinate with your Canadian CPA so both returns use consistent figures. We do not prepare the Canadian return. See real estate investor tax and cross-border tax services. More Canadian guides are on the Canada hub.

Frequently asked questions

General information only. It is not tax, legal, accounting or immigration advice for your situation, and rules change; confirm the current rules with the official source or a licensed professional in the relevant country.