Capital Gains Tax in Canada 2026: What Changed (and What Didn't)

If you've been confused about capital gains tax in Canada over the last two years, you're in good company. The federal Liberal government proposed raising the inclusion rate from 50% to 66.67% on gains over $250,000 in Budget 2024. It was supposed to take effect June 25, 2024. Then it was delayed. Then in March 2025, the new Conservative government cancelled it entirely. Many Canadians made significant financial decisions based on a tax change that ultimately never happened.

Here's what the rule actually is in 2026 — and what it means if you own real estate.

The current rule (May 2026)

The capital gains inclusion rate in Canada is 50%. This means if you have a $200,000 capital gain on the sale of an investment property, $100,000 of it is added to your taxable income for the year. At a marginal tax rate of 30%, you'd pay $30,000 in tax on that gain.

This is the rule that has applied for decades. It is unchanged as of 2026.

The Principal Residence Exemption

The biggest tax break in Canadian real estate. If a property has been your principal residence for every year you owned it, the gain on sale is completely exempt from capital gains tax. This is why most homeowners selling the home they live in pay zero tax on the sale.

Eligibility for the PRE:

• You (or your spouse, common-law partner, or child) ordinarily inhabited the home in each year you're claiming PRE.
• You designate the home as your principal residence each year on the appropriate tax form.
• One principal residence per family unit per year. You cannot designate two properties as principal residence for the same year.
• The property is not used as an income-producing property (or, if partially used, only the personal-use portion qualifies).

Where Toronto homeowners get tripped up

Five common scenarios where the PRE gets partially or fully lost:

1. Rented basement that was never reported

If you rented out your basement and didn't report the rental income, CRA may treat the rented portion as never having been principal residence — even retroactively. Partial PRE only.

2. Pre-construction condo that was never occupied

If you bought pre-construction with no intent to occupy and assigned it before completion, CRA increasingly treats the gain as business income — fully taxable, no PRE, no capital gains treatment. Aggressive enforcement on this since 2023.

3. Owned a cottage during the same years

Only one PRE per family unit per year. If you owned a Toronto home AND a cottage during the same years, you have to choose which property to designate as principal residence for each year. Most families designate the property with the largest annual gain.

4. Property was a secondary residence for part of the time

If you rented out the property for some years (or used it as a vacation home), those years don't qualify for PRE. Tax owed on a pro-rated portion of the gain.

5. Non-resident at time of sale

Different rules apply. Withholding tax of typically 25% on the gross sale price (not just the gain), and a clearance certificate process that takes weeks. Plan ahead if you're a non-resident.

If you're selling investment property

For investment property — rentals, secondary homes, pre-construction held as an investment, multiplex units beyond your own occupancy — capital gains tax at the 50% inclusion rate applies on the gain. The gain is calculated as sale price minus original purchase price minus capital improvements minus selling costs.

Important: depreciation (CCA) claimed on the property over the years gets recaptured at sale. This is fully taxable income, not capital gain. Many landlords don't claim CCA specifically to avoid recapture on sale — talk to an accountant about which strategy fits.

The political risk

The capital gains inclusion rate has been politically charged in Canada for the past two years. The current cancellation could be reversed in a future government. If you're considering a large gain on investment property, accelerating the sale to 2026 may make sense — but talk to a tax planner who specializes in real estate, not just a general accountant.

What to do if you're affected

If you might owe capital gains:

• Hire a CPA who specializes in real estate — not the general accountant who does your taxes. Cost: $300–$700 for a planning session. Worth every dollar.
• Document everything. Keep all closing documents, renovation receipts, rental records, expense records, depreciation claims. CRA may ask.
• File Form T2091 (PRE designation) in the year of sale. Skipping this is a common mistake.
• If non-resident — start the clearance certificate process months in advance.

I'm a licensed realtor, not an accountant. I can flag your situation and refer you to two Toronto CPAs who specialize in real estate. Talk to a professional before signing anything.