Capital Gains Tax When You Sell a Rental Property in Ontario

Selling a rental property usually raises more than one tax question. The profit on the sale, the depreciation you claimed while you were renting it out, and how you used the property over the years can all affect the bill.

This article explains in plain terms how the gain is worked out, what the inclusion rate means, what recapture is, and which special situations change the rules. It is general information, not tax advice, so confirm your own numbers with an accountant or lawyer before you sign.

How the capital gain is worked out

Selling a rental property for more than it cost may produce a capital gain, and the sale is reported on Schedule 3, Capital Gains or Losses. The starting point is your adjusted cost base (ACB), which is usually the cost of the property plus the costs of buying it, such as commissions and legal fees.

A capital gain is the amount by which your proceeds exceed the ACB plus the costs of selling. Legal fees you pay on the sale are deducted from the proceeds of disposition. They are not claimed as a rental expense.

• Proceeds: what you receive for the property.
• ACB: the purchase price plus buying costs such as commissions and legal fees.
• Selling costs: subtracted along with the ACB when you work out the gain.

The inclusion rate: how much of the gain is taxed

For 2025, the capital gains inclusion rate is generally one-half, so only half of a capital gain on selling a rental property is added to your taxable income. In plain terms, once you know your gain, half of that amount is what gets added to your income at that rate.

You may have heard about an increase to two-thirds for individuals' gains above $250,000 a year. That proposed increase was cancelled. Because rates and rules can change, check the CRA's information for the year you actually sell.

Recapture and terminal loss on the building

If you claimed capital cost allowance (CCA), which is the tax version of depreciation, you may face recapture. Recapture arises if the CCA you claimed in earlier years is more than the undepreciated balance left in the class when you sell, and the excess is added to income in full, not at the capital gains inclusion rate.

Selling a depreciable property such as a rental building cannot produce a capital loss. A terminal loss may be deductible instead if no property is left in the class but undeducted CCA remains. Keep in mind that CCA cannot be used to create or increase a rental loss.

Situations that change the picture

• Change in use: each time you change a property's use, for example from rental to personal use, you are treated as having sold it at fair market value, unless an election applies.
• Rental converted to your home: you can elect under subsection 45(3) to postpone reporting the disposition until you actually sell. The election is not available if you, your spouse or common-law partner, or a qualifying trust claimed CCA on the property after 1984.
• Part of your home rented out: you split the selling price between the residence part and the rental part. Any gain on the rental part is reported, and the rest can be designated as principal residence on Schedule 3 and Form T2091(IND).
• Non-resident sellers: a non-resident who sells Canadian real property must notify the CRA no later than 10 days after the sale, and to get a certificate of compliance generally pays or secures a flat 25% of the proceeds minus the ACB.
• Buyers from a non-resident: if no certificate is issued, the buyer may become liable for tax on the seller's behalf under subsection 116(5), and for depreciable property such as a rental building a separate amount is set under subsection 116(5.3), so how it is calculated is worth confirming with a lawyer or accountant.

What to do before you sell

Most of the work is in the paperwork. The closer your records are to complete, the easier it is to work out the gain and any recapture accurately.

• Find your original purchase documents, including the statement of adjustments and legal and commission costs.
• Gather your yearly CCA schedules so you know what you claimed.
• Note any time the property was used personally or partly rented.
• Estimate your selling costs and confirm which are deducted from proceeds.
• Ask an accountant to model the tax before you accept an offer, and a lawyer to review the sale documents.

Frequently asked questions