Capital Gains When Downsizing in Ontario

By Jatin Dua · Broker of Record, RE/MAX Quantum Realty · Updated 10 September 2026 · 10 min read — what the principal residence exemption covers when you downsize, what the 2025 rule changes actually did, and the four downsizer situations where tax genuinely arises.

Downsizing is the one moment in most people’s lives when a very large amount of money moves at once. That makes the tax question feel enormous. For the majority of people selling a long-held family home, the honest answer is that there is no capital gains tax to pay — but you still have to report the sale, and there are four specific situations where the answer changes.

One thing at the top, said plainly: this is not tax advice, and I am a real estate broker, not an accountant. Anything on this page with a number in it should be taken to a professional accountant before you act on it. If your file involves a rental period, a cottage, a business use, a separation, or a property held in a corporation or a trust, you need an accountant before you list — not in April.

Do you pay capital gains tax when you sell your home?

Usually not, if it was genuinely your home the whole time you owned it.

Canada’s principal residence exemption can eliminate the capital gain on the sale of a home you owned and that you, your spouse or common-law partner, or your child ordinarily inhabited, for each year you designate it. Crucially, the exemption is uncapped. There is no ceiling on the amount of gain it can shelter. A house bought in Etobicoke decades ago and sold today can produce an enormous gain and still be fully exempt.

Two limits people forget. First, a family unit can generally designate only one property per year as its principal residence. That is what makes the cottage question awkward. Second, the exemption covers the home and a reasonable amount of adjoining land; very large parcels can raise questions about how much land qualifies.

Did the capital gains rules change in 2024 and 2025?

Yes, then no, and the reversal is the part people missed.

The federal government announced an increase to the capital gains inclusion rate — the portion of a capital gain that is actually taxable — in 2024. That increase was cancelled on 21 March 2025. The inclusion rate remains one half. So where a gain is taxable, half of it is included in income and taxed at your marginal rate; the other half is not taxed.

If you delayed a sale in 2024 or 2025 because of that announcement, the reason for delaying is gone. That is worth saying out loud, because I still meet people operating on the 2024 headline.

What if the house was rented out for part of the time you owned it?

This is the most common real complication for downsizers, and it comes in ordinary shapes: the basement apartment rented for a decade, the years the house was tenanted while you worked abroad, the in-law suite that had a paying tenant.

The general principle is that the exemption applies to the years the property was your principal residence. Years in which it was earning income may not be sheltered, and the gain is then apportioned. There is also the concept of a change in use: when a property switches from personal use to income-producing, or back, tax law can treat you as having disposed of it at fair market value at that moment even though no money changed hands. There are elections that can change that treatment, and they have conditions and deadlines that I am not going to state here.

What I will say clearly: if any part of the property ever earned rent, tell your accountant before you list. Bring the dates, the rent records and any renovation receipts. There is more background in my note on the change of use and principal residence election, and it should be read as background, not as instructions.

What about the cottage or the second property?

This is where the one-property-per-family-per-year rule bites. If you own a house and a cottage and both were ordinarily inhabited by the family, you cannot shelter both for the same years. You can designate the property that produces the better outcome for the years in question, and the years you assign to one are years you cannot assign to the other.

Which choice is better depends on the purchase prices, the current values, the number of years, and what you plan to do with the property you keep. That is an arithmetic exercise for an accountant with the actual numbers, and it is genuinely worth paying for. Do it before you commit to a sale date, because once both properties are sold the choices are narrower.

Could the flipping rule catch a downsizer?

Rarely, but it is worth knowing because downsizers sometimes move twice.

The federal residential property flipping rule deems the profit on a housing unit owned for fewer than 365 consecutive days to be business income rather than a capital gain — and the principal residence exemption does not apply to business income. That is a harder result than a taxable capital gain, because business income is fully included, not half.

There are named life-event exceptions, and they read like a list of the reasons people actually move at this stage of life: death, an addition to the household, the breakdown of a marriage or common-law partnership, a threat to personal safety, a serious disability or illness, a change of employment, and an involuntary disposition such as a fire or an expropriation, along with insolvency.

The scenario to watch for: you downsize into a condominium, it does not suit you, and you move again within a year. If nothing on the exceptions list applies, the second sale can be caught. It does not mean you should not move — it means you should know before you sign, and it is one more argument for renting a small place for a year before buying, if you are not sure.

What if you are moving into a retirement residence?

Two things change, and one of them is a tax people do not see coming.

First, the house may sit empty for months while family decides what to do with it. Toronto’s Vacant Home Tax is 3% of the current value assessment, and there is a mandatory annual declaration of occupancy status for every residential property in the city whether it is occupied or not, with a penalty of up to $10,000 for failing to declare. A parent who has moved into a residence and a house nobody has declared for is exactly the file this tax was built to catch. Exemptions exist and are set by the City — read the City’s current page and make the declaration on time.

Second, if the family rents the house out rather than selling it, that is a change in use, with all the consequences described above. Get advice before the first tenant moves in, not after.

The choice between staying put and moving is not only a tax question, of course. I have written a two-sided comparison at aging in place or downsizing in Etobicoke.

What happened to the Underused Housing Tax?

It is gone. The federal Underused Housing Tax was eliminated for 2025 and later years. If you were filing or worrying about it for a vacant family property, that particular obligation no longer applies going forward. It does not affect Toronto’s municipal Vacant Home Tax, which is a separate, city-level tax and very much still in force. I have covered the elimination separately at the Underused Housing Tax elimination.

What about the tax on the place you buy next?

Different tax, and it lands on the purchase rather than the sale. Buying inside the City of Toronto — which includes all of Etobicoke — means paying both the Ontario land transfer tax and the Toronto municipal land transfer tax. On a $700,000 purchase that is $10,475 each, $20,950 in total. On a $1,000,000 purchase, $16,475 each, $32,950 in total.

Toronto added new higher brackets above $3 million effective 1 April 2026, but nothing at or below $3 million changed — which covers essentially every downsizing purchase. For context, the average Etobicoke condominium apartment sold for $598,570 in August 2026. Budget the land transfer tax as cash on closing; it is not financeable.

So who do you actually need?

An accountant, for anything involving a rental period, a second property, a business use, a corporation or a trust, a move within 365 days, or a large gain you are unsure about. Engage them before the listing goes live, because some choices close off once a sale is firm.

A real estate lawyer, for the transaction itself, title, and the closing. There is a plain description of what they do at what a real estate lawyer does in Ontario.

A broker, for what the property is worth and how to get that number, which is the part I can actually answer.

Frequently asked questions

Sources

• Canada Revenue Agency — Principal residence and other real estate. The principal residence exemption, the one-property-per-family-per-year designation, and the requirement to report the disposition. Accessed 10 September 2026.
• Department of Finance Canada. Cancellation of the announced capital gains inclusion rate increase on 21 March 2025; the inclusion rate remains one half. Accessed 10 September 2026.
• Canada Revenue Agency — Residential property flipping rule. The fewer-than-365-consecutive-days test and the named life-event exceptions. Accessed 10 September 2026.
• Canada Revenue Agency — Underused Housing Tax. Elimination of the tax for 2025 and later years. Accessed 10 September 2026.
• City of Toronto — Vacant Home Tax. The 3% rate on current value assessment, the mandatory annual declaration and the penalty of up to $10,000 for failing to declare. Accessed 10 September 2026.
• Ontario — Land transfer tax. Provincial rate bands used in the worked totals above. Accessed 10 September 2026.
• TRREB Market Watch, August 2026. Etobicoke condominium apartment average price of $598,570 in August 2026, aggregated from the published district tables for W06 to W10. Released 3 September 2026.

Related reading

• Reverse Mortgage Ontario: How It Works, Costs and Alternatives (2026)
• Aging in place or downsizing in Etobicoke: an honest comparison
• Change of use and the principal residence election in Ontario
• Executor selling a home in Ontario: what the job actually involves
• What does a real estate lawyer actually do in Ontario?