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Downsizing

Downsizing

Life event3 min readFebruary 11, 2026
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Downsizing, or reducing the size of one's property, is an increasingly popular strategy among Canadian retirees seeking to unlock equity accumulated in their principal residence. In Canada, the sale of a principal residence is generally exempt from capital gains tax under section 40(2)(b) of the Income Tax Act, providing a major tax advantage for retirees who choose to sell. However, the process involves significant transaction costs, including the real estate agent's commission (typically between 4% and 5% of the sale price), notary fees, transfer duties (welcome tax) on the new property, and moving expenses. In Quebec, transfer duties are calculated on progressive brackets established by the Act respecting duties on transfers of immovables (R.S.Q., c. D-15.1). The net difference between the sale price and the purchase price of the new property can be used to pay off an existing mortgage, fund a RRIF or TFSA, or build a reserve fund. A mortgage broker can help déterminé whether a new loan is needed for the smaller property and structure the financing optimally for retirement.

Downsizing in retirement: a strategy to unlock your equity

Downsizing means selling your current property to buy a smaller, less expensive home that is often better suited to retirement needs. This approach frees up a significant portion of the equity accumulated over the years. For many Canadian households, the principal residence represents the most important asset in their net worth. According to Statistics Canada, the median value of the principal residence for homeowner households aged 65 and over exceeded $400,000 in 2023. Downsizing is therefore a practical way to convert this tied-up asset into usable cash.

The principal residence tax advantage

In Canada, capital gains realized on the sale of a principal residence are exempt from tax under section 40(2)(b) of the Income Tax Act (R.S.C., 1985, c. 1, 5th Supp.). To benefit from this exemption, the owner must designate the property as their principal residence for each taxation year during which they owned it. Since 2016, this designation must be made in the tax return for the year of sale (Form T2091 for individuals). Failure to report can result in penalties. When the property has always been used exclusively as a principal residence, the gain is fully exempt, making downsizing a tax-efficient strategy.

Transaction costs to plan for

  1. Real estate agent commission: Typically 4% to 5% of the sale price, split between the listing agent and the cooperating agent. On a $500,000 property, this represents $20,000 to $25,000 plus applicable taxes.
  2. Notary fees: Expect between $1,500 and $3,000 per transaction (sale and purchase). Some notaries offer a flat rate for both transactions combined.
  3. Transfer duties (welcome tax): Calculated on the new property's price using progressive brackets: 0.5% on the first $58,900, 1% from $58,900 to $294,600, 1.5% from $294,600 to $500,000, and higher rates in municipalities that have adopted them (Montreal applies 3% above $500,000).
  4. Prepayment penalty: If your current mortgage is fixed-rate and the term has not matured, the lender may charge a penalty equal to the greater of three months' interest or the interest rate differential (IRD). A mortgage broker can estimate this penalty before you make your decision.
  5. Moving and adaptation costs: Include the cost of professional movers, possible purchase of new furniture suited to the smaller space, and any modification or renovation costs for the new home.

Using freed equity wisely

The net difference between the sale price of your current property and the total acquisition cost of your new home (including all fees) represents your freed equity. Several options exist to optimize these funds. Full repayment of any remaining debt, including the mortgage, is often prioritized to eliminate financial obligations in retirement. If you have contribution room in your TFSA, it is an ideal vehicle since investment income generated is not taxable and does not affect eligibility for the Guaranteed Income Supplement (GIS). RRSP contributions or transfers to a RRIF are also options, but withdrawals will be taxable.

Mortgage considerations for downsizing

If you need a loan for the new property, know that mortgage qualification in retirement is based on your retirement income (pensions, RRIF, annuities, investment income). Lenders assess your repayment capacity using the same debt service ratios (GDS and TDS) as for any borrower. The OSFI stress test also applies. Your mortgage broker can help you present your file optimally by including all eligible income sources and choosing the term and amortization best suited to your retirement horizon.

Frequently Asked Questions

Do I have to pay tax when I sell my principal residence to downsize?
Generally, no. The sale of your principal residence is exempt from capital gains tax in Canada, provided you designate it as your principal residence for each year of ownership. However, it is necessary to report the sale on your fédéral tax return (Form T2091) since 2016. In Quebec, no separate provincial form is required, but the gain must be reported if the exemption does not cover all years of ownership.
What are the main transaction costs when downsizing?
Costs include the real estate agent's commission (4% to 5% of the sale price), notary fees for the sale and purchase ($1,500 to $3,000 per transaction), transfer duties on the new property (welcome tax, calculated on progressive brackets), moving expenses, and potentially a prepayment penalty if you break your mortgage before the end of the term.
How can I use the equity freed up by downsizing?
The freed equity can be used to pay off the remaining mortgage balance, maximize TFSA or RRIF contributions, create a retirement emergency fund, help a child with their down payment, or invest in a diversified portfolio. A financial planner can help you prioritize based on your situation.
Do I need a new mortgage after downsizing?
Not necessarily. If the sale proceeds are sufficient to buy the new property outright, no loan is required. However, some retirees choose to maintain a small low-rate mortgage to keep cash invested at a higher return. A mortgage broker can analyze both scenarios and recommend the best approach.
Does downsizing affect my government benefits?
The sale itself, being exempt, does not increase your taxable income. However, if you invest the net proceeds and generate investment income, that income could affect income-tested benefits like the Guaranteed Income Supplement (GIS). A TFSA is a preferred option since income accumulated there is not taxable and does not affect GIS eligibility.

Educational information only. This does not constitute financial advice under the Act Respecting the Distribution of Financial Products and Services (LDPSF). Consult an AMF-certified mortgage broker before making any financial decision.

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