Real Estate Tax

The Principal Residence Exemption (PRE) generally eliminates capital gains tax on the sale of a home you "ordinarily inhabited" during ownership, designating that property as your principal residence for those years. Only one property per family unit can be designated per year. If you rented out part of the home (e.g., a basement unit with a separate entrance) and claimed depreciation (CCA) on the rental portion, that portion loses PRE eligibility for those years and a proportional capital gain becomes taxable on sale. If the rental was a minor, ancillary use without structural changes or CCA claimed, full PRE coverage usually still applies. Since 2016, the sale must be reported on Schedule 3 of your T1 even when fully exempt.

Currently deductible expenses include mortgage interest (not principal), property tax, utilities, insurance, repairs and maintenance, property management fees, advertising, accounting and legal fees, and travel for property visits when reasonable. Capital expenses (additions, major renovations, appliances) must be capitalized and depreciated over time using Capital Cost Allowance, but claiming CCA on a building can jeopardize the Principal Residence Exemption later, so it's a deliberate trade-off. Commonly missed deductions include partial home-office expenses for landlords managing properties from home, vehicle expenses for property visits, and condo fees. Personal-use portions must be excluded.

The capital gain equals the proceeds of disposition minus the adjusted cost base (purchase price plus capital improvements over the years) minus selling costs (legal fees, real estate commissions). Under current rules the taxable portion is 50% of the gain. So if you realize a $200,000 gain, $100,000 is added to your income and taxed at your marginal rate. (Note: rate proposals around higher inclusion above specific thresholds have been discussed federally; verify the current inclusion rate at the time of writing.) If the property has depreciable improvements with CCA claimed, recapture of CCA is also added to income separately as ordinary income, in addition to the capital gain.

For rental income: a Canadian payer (typically the property manager or tenant if no manager) is required to withhold 25% of gross rent and remit it monthly to the CRA. The non-resident can elect under Section 216 to file a Canadian return reporting net rental income (after expenses) and recover excess withholding. This is usually a much better result than 25% on gross. For sales: the buyer must withhold 25% of the gross sale proceeds (50% for depreciable property like buildings) under Section 116 unless the seller obtains a Certificate of Compliance from the CRA in advance, which permits withholding only on the actual gain. Failure to obtain the certificate makes the buyer personally liable for the withholding, so they always insist on it.