Detailed explanation based on Canadian tax law
- JKB Services
- Nov 15
- 3 min read
Here is the detailed explanation based on Canadian tax law.
Exemption for Main Residence (ERP)
This is the key concept in Canada for avoiding capital gains tax when selling a property. To claim the ERP for a given year, the property must meet all of the following conditions:
It must be a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a housing cooperative.
You must have owned the property alone or jointly with another person.
You, your current or former spouse or common-law partner, or your child must have "ordinarily inhabited" the property during the year.
Application to your situation
Your specific case
Since you have never lived in the unit and no other member of your family has done so, you cannot claim the Principal Residence Exemption for any of the years you owned it (2021-2024).
Renovation period
The renovation period does not qualify as "ordinary housing".
Calculating capital gains tax
Because the ERP does not apply, the entire profit from the sale will be considered a taxable capital gain.
Taxable capital gain = (Selling price - Selling expenses) - (Purchase price + Purchase expenses + Capital improvements)
Important definitions:
Sales costs: Include real estate agent commissions, legal fees, and any other costs directly related to the sale.
Major improvements: These are renovations that add value to the property, extend its useful life, or adapt it for new uses (for example, adding a bathroom, replacing the roof, renovating the kitchen). The cost of these improvements can be added to your purchase price (Adjusted Cost Base) to reduce your taxable gain. Keep all your invoices for the renovations you have made.
How the gain is taxed:
Inclusion rate: Only 50% of your capital gain is taxable. This is called the taxable capital gain.
Tax payable: You add this taxable amount (50% of the gain) to your annual income for the year of the sale. It is then taxed at your marginal tax rate (which depends on your total income and the province where you live).
Example :
Purchase price (2021): $400,000
Sale price (2024): $550,000
Major improvements (with invoices): $30,000
Real estate commission and legal fees: $35,000
Capital gain = $550,000 - $35,000 - ($400,000 + $30,000) = $85,000
Taxable capital gain (added to your income) = $85,000 x 50% = $42,500
You would then pay tax on that $42,500 at your marginal tax rate.
The "Change of Address" Strategy
As in France, this strategy is ineffective in Canada. The Canada Revenue Agency (CRA) examines the usage history for the years you owned the property.
What doesn't work
Moving out just before the sale will not allow you to claim the property as your primary residence for the entire period of ownership.
You can only designate the property as your main residence for the years you actually lived there.
Limited impact
Since you are selling in the same year you are moving, you could only claim the ERP for a fraction of a year, which offers minimal benefit and would not exempt the gains from previous years (2021-2023).
Summary for Canada
Postman | Your situation | Impact on capital gains tax |
Primary residence | No, you never lived there during 2021-2023. | The ERP exemption does not apply. The gain is taxable. |
Change of address | Now, just before the sale. | It won't work. The CRA assesses property usage year by year. |
Tax calculation | Sale in 2024. | 50% of the capital gain is added to your income and taxed at your marginal rate. |
Strong recommendation
Document everything
Gather all invoices for your purchase (legal fees, land transfer tax) and especially for all major improvements made during the renovation. This is the most effective way to legally reduce your taxable gain.
Consult a professional
It is strongly recommended that you speak with a Canadian accountant or tax advisor before finalizing the sale. They can:
Confirm which renovation costs qualify as major improvements.
Advise on the specific tax impact based on your province of residence and total income.
Make sure you complete your tax return correctly to report the sale.
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