The tax implications of buying a second home in Canada

Primary residences vs. secondary properties

The tax treatment of real estate in Canada depends on its use. The home you live in—your primary residence—is normally exempt from capital gains tax upon sale due to the primary residence exemption.

This exemption can even be used on vacation properties, so long as it is “ordinarily inhabited.” While the definition of “ordinarily inhabited” is vague, it means at a minimum you spent time living there during a calendar year. And while there’s an exception for years in which you move and own two homes, you can otherwise only declare one property as your primary residence at any given time. Generally speaking, you’ll want to apply the exemption to the property that has increased in value the most.

Rental properties don’t qualify for this exemption under most circumstances. When they’re sold, if they have increased in value, capital gains taxes will normally apply.

Capital gains tax on a second property in Canada

When selling a property, if you can’t use the primary residence exemption, then capital gains taxes will be levied against the increase in value. But capital gains are relatively tax-efficient, since only half of the gain is taxable—the other half you can stick in your jeans.

To calculate the capital gain, you need to first calculate the adjusted cost base, or ACB, against which the sale proceeds will be measured. The starting point is the purchase price, and from there certain additions and deductions can be applied. Common additions include expenses incurred to purchase the property, like commissions and legal fees. Capital expenses, like those used to improve or upgrade the property, can also be added.

Here’s where it gets a little complicated. Because a building is depreciable property which may wear out over time, investors can deduct a percentage of the property’s cost each year—known as “capital cost allowance,” or CCA. It can only be used against the building itself, not the land portion of the property. When the property is eventually disposed of, the undepreciated capital cost, or UCC—that is, the original cost minus the amount of CCA claimed—is recaptured and taxed as income, with additional proceeds being taxed as a capital gain.

As a simplified example, say you bought a rental property for $1,000,000. Over the years, you deducted $200,000 of CCA. You then sold the property for $1,300,000. Here’s how it would be taxed:

• Original cost: $1,000,000
• CCA claimed: $200,000
• Undepreciated capital cost: $800,000

When the rental property is sold, that $200,000 CCA is recaptured and taxed as income. And since you sold it for $1,300,000, you have a capital gain of $300,000. Capital gains inclusion rates were recently changed in Canada. Effective June 25, 2024, 50% on the first $250,000 of capital gains incurred in a calendar year must be included as income. And for any capital gains above this amount, two-thirds (66.67%) are included as income. In our example, that results in $158,333.33 added to your income (($250,000 x 50%) + ($50,000 x 66.67%)). Between the recapture and the taxable capital gain, you have $358,333.33 of income to report on your tax return.

Capital expenses vs. current expenses: What’s the difference?

In the above example, the cost of improving the property is a capital cost. It extends the useful life of the property or increases its value. Capital expenses can increase the ACB of the property and can be deducted over time via the CCA. Examples include:

• Replacing the roof
• Installing new windows that improve the property
• Upgrading the plumbing or electrical system

On the other hand, some day-to-day expenses are incurred just to maintain the property or maintain ownership of it. They occur more frequently and do not improve the property, but might restore it to its original condition. These more common expenses are deductible all at once, in the year they are incurred. Examples include:

• Mortgage interest
• Property taxes and insurance
• Costs for repairing broken fixtures or touching up the interior paint

Can you claim a rental loss?

If your rental expenses exceed the rental income in a given year, you may have a rental loss for tax purposes. This loss can be used to offset other sources of income, like employment or investment income. And while CCA can be used as a deduction, it can’t be used to create or increase a rental loss.

In order to claim a rental loss, you must be able to demonstrate that you are making a legitimate effort to generate rental income—for example, that you are advertising the property for rent, and that your asking rent is in line with market rates. If a property is vacant, that’s OK, as long as you’re making a genuine effort to rent it out. Failure to meet this test means your rental loss might be denied.

Regardless of your reasons for buying a second property, understanding and navigating the tax impact is vital. Whether the property is for personal use or rental income, it pays to be informed.

Read more about buying a second home:

• It’s possible to be a first-time home buyer twice—here’s how
• How to use equity to buy a second home
• How much of a down payment do you need on a second home?
• Mortgage rules when buying a second property in Canada: What you need to know
• Mortgage renewal calculator

About Mark McGrath, CFP, CIM, CLU

Mark McGrath is a Financial Planner and Associate Portfolio Manager with PWL Capital Inc. He helps create financial clarity, confidence and comfort for Canadian business owners and professionals. PWL is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization.

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