Capital Gains Tax When You Sell a Second Property in Ontario

Selling a cottage, rental unit, or investment property feels like a financial win — until your accountant tells you about the tax bill waiting on the other side. Capital gains tax on property in Canada surprises many Ontario homeowners who assume the same exemption that protects their family home applies to everything they own. It doesn't.

This article explains how a capital gain is calculated when you sell a second property, what the inclusion rate means for your tax return, and why cottages and rental properties sit outside the principal residence exemption. We'll also cover what records to gather and when to bring in a lawyer.

One important note before we start: tax rates, inclusion rates, and government programs change. Everything below reflects general concepts that have been durable over time, but you should confirm current rules and amounts directly with the Canada Revenue Agency (CRA) or a qualified accountant before filing.

What Is a Capital Gain on Property?

A capital gain is the profit you make when you sell a capital property for more than it cost you. The Canada Revenue Agency taxes that profit — but not all of it, and not at the same rate as ordinary income.

The formula is straightforward in principle:

Capital Gain = Proceeds of Disposition − Adjusted Cost Base (ACB) − Selling Costs

Each of those terms has a specific meaning:

• Proceeds of disposition — the sale price, or the fair market value of what you received.
• Adjusted cost base (ACB) — what you originally paid, plus qualifying costs you added over the years (more on this below).
• Selling costs — real estate commissions, legal fees, and other closing costs paid to complete the sale.

Whatever is left after subtracting ACB and selling costs is your capital gain for the year.

What Goes Into Your Adjusted Cost Base?

The ACB is not just the original purchase price. Over the years, certain improvements to the property can be added to your ACB, which reduces your eventual capital gain. Think of things like a new roof, a septic system replacement, or a major addition — capital improvements that increase the property's value or extend its useful life.

Routine repairs and maintenance (repainting, replacing a broken appliance) do not increase the ACB. The distinction matters, and keeping clean records from the day you buy is the single most important thing you can do to protect yourself at sale time.

The Inclusion Rate: How Much of the Gain Is Taxable?

Canada does not tax 100 percent of a capital gain. Instead, a portion of the gain — determined by the inclusion rate — is added to your income and taxed at your marginal tax rate.

As of writing, the inclusion rate for individuals has been the subject of legislative discussion and change. Do not rely on any number you read here or elsewhere as settled law. Before you sell, confirm the current inclusion rate with CRA or your accountant, because even a small change in the rate meaningfully affects how much tax you owe.

What is durable: only the included portion of the gain is taxed. The rest is yours, tax-free. A lower inclusion rate is better for sellers; a higher one means more of your gain ends up on your income for the year.

The Principal Residence Exemption — and Why It Doesn't Apply Here

If you sell the home you live in, you can generally claim the principal residence exemption (PRE) to shelter all or most of the gain from tax. The PRE is one of the most valuable tax shelters available to Canadian individuals.

The catch: you can only designate one property as your principal residence for any given tax year. Most families designate their primary home. That means a cottage, a rental property, a secondary condo, or an investment property cannot also be designated — and the gain on those properties is fully exposed to capital gains tax.

There are edge cases. If you owned the second property for many years, you may be able to allocate some principal residence years to it under the old rules. This is genuinely complex territory that requires professional advice — do not assume one way or the other without speaking to an accountant.

Cottages and Rental Properties: Common Scenarios

Selling a Cottage

Cottages often have large embedded gains because they were bought decades ago at prices far below today's market. The ACB for a family cottage may be modest, and the current value may be significant.

If the cottage has been in the family for a long time, you may also face a deemed disposition issue: when you transfer the cottage to a child or grandchild (even as a gift), CRA generally treats the transfer as a sale at fair market value. The capital gain exists even if no money changed hands. Confirm the deemed disposition rules with an accountant before any transfer.

Selling a Rental Property

Rental properties carry two layers of tax exposure at sale:

1. Capital gain on the appreciation in value since you bought it.
2. Recaptured depreciation (CCA recapture) — if you claimed Capital Cost Allowance (depreciation) on the property in prior years, CRA will "recapture" those deductions and add them back to your income in the year of sale. This is taxed as ordinary income, not at the favourable capital gains rate.

Both items need to be accounted for when estimating your total tax bill on a rental sale.

Records to Gather Before You Sell

Good recordkeeping is your best defence against an overstated capital gain. Before you list, locate:

• Original purchase documents and closing statement (your base ACB)
• Receipts for all capital improvements made over your ownership period
• Records of any prior claims (CCA, losses applied against the property)
• If it was a rental, prior-year tax returns showing CCA claimed

Frequently asked questions