Do I have to pay capital gains tax when I sell my rental property in Ontario?

Yes. When you sell a rental property in Ontario, any profit above your adjusted cost base is a capital gain, and the taxable portion is included in your income for that year under the federal Income Tax Act. Unlike your principal residence, a rental property does not benefit from the principal residence exemption.

Ontario residents pay both federal and provincial income tax on the included gain, so the combined marginal rate on your taxable portion can be substantial depending on your income. You should also be aware of depreciation (capital cost allowance, or CCA) recapture: if you claimed CCA deductions against rental income while you owned the property, some or all of those deductions will be "recaptured" and added to your income as ordinary income — not just as a capital gain — in the year of sale.

Planning before you sell is important. Strategies such as timing the sale across two tax years, transferring the property to a corporation, or using a spousal rollover may affect your outcome. A tax accountant and a lawyer working together can help you understand the options specific to your situation before you sign an agreement to sell.