Real Estate Taxation in Canada: What Buyers, Sellers, and Landlords Need to Know

Investing in real estate can be a lucrative way to build wealth, generate passive income, and diversify your portfolio. But to get the most out of your investments, it’s essential to understand how taxes work—and more importantly, how to reduce your tax burden through eligible deductions.

As accounting professionals serving real estate investors across Canada, we often get asked: What expenses can I deduct from my rental income? The good news is that the Canada Revenue Agency (CRA) allows a wide range of tax deductions that can significantly reduce your taxable rental income, provided you’re aware of the rules and maintain good documentation.

In this blog, we’ll walk you through the most common—and often most valuable—tax deductions for Canadian real estate investors. Whether you own a single rental property or a growing portfolio, this guide will help you optimize your returns and stay compliant with CRA regulations.

1. Buying Real Estate: Tax Considerations

When you purchase real estate in Canada, there are several tax-related factors to consider:

a. Land Transfer Tax

Buyers must pay a provincial or territorial Land Transfer Tax (LTT) upon acquiring real property. Some municipalities, such as Toronto, also impose a Municipal Land Transfer Tax. The rates vary by province and are typically calculated as a percentage of the purchase price. First-time homebuyers may be eligible for rebates in certain jurisdictions.

b. GST/HST on New Builds

Newly constructed or substantially renovated residential properties are generally subject to GST or HST, depending on the province. Resale (used) residential homes are typically exempt. However, the buyer may qualify for a partial GST/HST rebate if the property is intended for personal use and falls within a specified price range.

c. Principal Residence Designation

If the purchased property is intended to be your principal residence, this designation may shelter you from capital gains tax upon sale, provided certain conditions are met. Keeping detailed records (such as occupancy periods and property use) is important for claiming this exemption.

2. Selling Real Estate: Capital Gains and Other Tax Implications

When selling real estate, the tax treatment depends largely on the nature and use of the property.

a. Principal Residence Exemption (PRE)

The sale of your principal residence is generally exempt from capital gains tax. However, to qualify:

The property must be ordinarily inhabited by the taxpayer or their family during the year.

Only one property can be designated as a principal residence per family per year.


As of 2016, the Canada Revenue Agency (CRA) requires taxpayers to report the sale of their principal residence on their income tax return to claim the exemption.

b. Capital Gains Tax on Secondary Properties

For properties that are not your principal residence (e.g., cottages, rental properties, investment real estate), any gain realized on sale is considered a capital gain.

50% of the capital gain is taxable at the individual’s marginal tax rate.

The gain is calculated as the difference between the selling price and the adjusted cost base (ACB), less any selling costs.


It is essential to maintain accurate records, including purchase documents, improvement receipts, and selling costs, to correctly calculate capital gains.

c. Change in Use: Deemed Disposition

When a property’s use changes (e.g., from principal residence to rental property or vice versa), the CRA treats it as a “deemed disposition.”

You are considered to have disposed of the property at fair market value and reacquired it immediately.

This may trigger capital gains unless you file a special election (Form T2091 or T2091(IND)) to defer the capital gain, provided certain conditions are met.


It is essential to maintain accurate records, including purchase documents, improvement receipts, and selling costs, to correctly calculate capital gains.

3. Rental Real Estate: Reporting Income and Expenses

Owning rental property can be a lucrative source of income, but it also comes with specific tax obligations.

a. Reporting Rental Income

Rental income must be reported annually on your T1 tax return using Form T776 (Statement of Real Estate Rentals).

Gross rental income includes rent and any other payments received from tenants.

The rental income should be reported on an accrual basis (i.e., when earned, not when received).

b. Deductible Expenses

You can deduct reasonable expenses incurred to earn rental income. Common deductions include:

Mortgage interest (but not principal repayments)

Property taxes

Utilities (if paid by the landlord)

Insurance

Maintenance and repairs

Property management fees

Advertising for tenants

Depreciation (Capital Cost Allowance or CCA)

Note: Claiming CCA may reduce or eliminate a capital gain exemption on future sales, so this decision should be made strategically.

c. GST/HST Considerations for Rental Income

Residential rental income is generally exempt from GST/HST. However, short-term rentals (e.g., Airbnb-type arrangements under 30 days) may be considered taxable supplies, requiring the landlord to charge and remit GST/HST if total taxable revenues exceed the $30,000 threshold.

4. Real Estate and Business Activities

In some cases, real estate transactions may be treated as business income rather than capital gains, depending on the taxpayer’s intent and frequency of transactions.

a. Real Estate Flipping

If a taxpayer buys and sells properties frequently or with the intention of making a profit, the CRA may classify the income as business income rather than a capital gain.

Business income is fully taxable (100%), and no 50% capital gains inclusion rate applies.

GST/HST may apply to the sale of the property.

The CRA looks at several factors, including the taxpayer’s occupation, history of transactions, and intent at the time of purchase.

5. Tax Tips and Planning Strategies

Proper tax planning can significantly reduce your real estate tax burden. Consider the following strategies:

a. Keep Comprehensive Records

Maintain detailed records of all real estate transactions, including purchase and sale agreements, receipts for improvements, mortgage documents, and rental income statements.

b. Consult a Tax Advisor

Given the complexity of real estate taxation, it’s advisable to consult a tax professional before initiating a transaction. This is especially important in cases involving change of use, large capital gains, or mixed-use properties.

c. Consider Incorporation for Rental Properties

In some cases, holding rental properties in a corporation may offer tax deferral opportunities and asset protection. However, this adds complexity and may limit access to the principal residence exemption.

d. Timing of Sale

Where possible, consider the timing of a sale to offset capital gains against capital losses or to take advantage of a lower marginal tax rate year.

Conclusion

Real estate transactions in Canada can have significant tax implications. Whether you are buying, selling, or renting property, it is critical to understand how taxes such as capital gains, GST/HST, and rental income reporting rules apply to your specific situation. Proactive planning and proper guidance from a Canadian tax professional can help you optimize your tax position and avoid costly mistakes.

For more information or personalized advice, contact our firm to speak with a qualified tax advisor who specializes in real estate taxation.

Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Please consult a tax professional for guidance specific to your situation.

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