What is the capital gains inclusion rate in Canada?
Canada taxes only 50% of a capital gain as income (the 'inclusion rate'). So if you sell an investment property for a $200,000 gain, only $100,000 is added to your taxable income and taxed at your marginal rate. The 2024 federal budget proposed raising the inclusion rate to 2/3 for gains over $250,000 annually, but legislative status should be verified. The primary residence exemption fully shelters gains on your principal residence.
How does the principal residence exemption work in Canada?
A property qualifies as your principal residence for a year if you (or your spouse/child) ordinarily inhabited it during that year. The exemption formula is: (1 + years designated as principal residence) / total years owned × total gain. A property can be fully exempt if designated as your principal residence for all years of ownership. You can only designate one property per year per family unit.
Do I have to report a capital gain on my principal residence in Canada?
Yes, since 2016 you must report the sale of your principal residence on Schedule 3 of your tax return, even if the full gain is exempt. Failure to report can result in a penalty of up to $8,000 per year the designation is not made. Your T4037 (Capital Gains) and Schedule 3 must be filed in the year of sale.