What is a terminal loss and how does it work when I sell a rental property for less than its tax value?

A terminal loss happens when you sell, or your property is otherwise disposed of, for less than its remaining undepreciated capital cost, or UCC, and it's the last property left in that CCA class. The shortfall between the sale price and the UCC becomes a terminal loss, and unlike an ordinary capital loss, it's fully deductible against any other income you have that year - not just capital gains.

This is a genuinely valuable distinction worth understanding, since most losses people are familiar with, like investment capital losses, can only offset capital gains. A terminal loss is different: because it reflects CCA you claimed on the assumption the property would hold its value but which turned out to be more than the property was actually worth, CRA lets you deduct the full shortfall against employment income, business income, or anything else in that tax year. The catch is that it only applies once it's the last property in its CCA class - if you still own other buildings in the same class, the loss is deferred rather than triggered right away, which is addressed further in a related question. Getting the UCC calculation right at the time of sale is essential to claiming this correctly.