Selling a Rental Property in Ontario: CCA Recapture Explained

If you have claimed capital cost allowance (CCA) on a rental property in Ontario, selling it can bring a tax bill that surprises people. That bill is called recapture.

This article explains how recapture works, how it sits alongside capital gains, and what to think about when deciding whether to claim CCA. A lawyer or accountant can apply this to your situation.

What CCA is

Current rental expenses, which give a short-term benefit, are generally deductible in the year incurred. Capital expenses give a benefit that usually lasts several years, so their cost is deducted over time through CCA.

If you received rental income from real estate, you must file a statement of income and expenses (Form T776). Gross rents go on line 8299, and the net amount from line 9946 goes on line 12600 of your return.

• Rental buildings are generally Class 1 (4%) for CCA.
• Land is not depreciable property.
• In the year you acquire a rental property, you can usually claim CCA on only one-half of your net additions to a class.
• Each rental property acquired after 1971 with a capital cost of $50,000 or more must be put in a separate CCA class.
• You cannot use CCA to create or increase a rental loss.

How recapture works on sale

When you sell a rental property, recapture of CCA arises if the proceeds take the class's undepreciated capital cost (UCC) below zero. Recapture is reported on Form T776 (line 9947).

If the property sells for more than its cost, you may have both a capital gain and recapture. The sale itself is reported on Schedule 3.

In plain words, CCA lowers your rental income while you own the property, and recapture is how some of that benefit can come back when the sale price is high enough. How much applies to you depends on your own numbers, so it is worth confirming with an accountant.

Recapture versus capital gain

A capital gain is the proceeds of disposition minus the adjusted cost base (ACB) and any outlays and expenses of selling. The capital gains inclusion rate for 2025 is 50%, so half of a capital gain is taxable. Check the current year's rate before relying on it for a later sale.

Report capital gains and losses on Schedule 3 and the taxable capital gain on line 12700.

Terminal loss and joint owners

If a balance is left in the class after the last property in it is sold, you can usually deduct that terminal loss from rental income in the year of sale. You cannot have a capital loss on depreciable property.

If you own the property with others, each co-owner reports their share of rental income or loss according to their ownership share.

When use changes: moving out, moving back or a quick sale

Rental use can start or stop partway through your ownership of a home, and that changes the tax picture. Every time you change the use of a property, you are treated as having sold it at fair market value and bought it back at the same amount. This applies, for example, when you move out of your home and rent it.

There is an exception. When you turn your principal residence into a rental, you can elect not to be treated as having changed its use. While the election is in effect, you can designate the home as your principal residence for up to four years, and you cannot claim CCA on the property while the election applies. To make the election, attach a signed letter to your income tax and benefit return for the year the change of use happens.

• The four-year limit is removed when your employer relocates you, but only if the conditions are met. These include that the home must be at least 40 kilometres farther from the new workplace than your later residence, and that the employer must not be related to you or your spouse or common-law partner.
• If a rental is converted back to your home, you can elect to postpone reporting the deemed sale until you actually sell, and you can designate the home for up to four years before you move in.
• If you rent only part of your home, you split the selling price and adjusted cost base between the two uses on a reasonable basis, such as square metres or number of rooms.
• The CRA generally keeps full principal residence treatment where the rental use is ancillary to the home's main use as a residence, there is no structural change, and no CCA is claimed.

Selling soon after buying can also change the result. Under the residential property flipping rule, profit on a flipped property is deemed to be business income and the principal residence exemption is not available. A flipped property is a housing unit in Canada, not already inventory, owned for less than 365 consecutive days before it is sold. A loss on the sale of a flipped property is deemed to be nil.

The flipping rule does not apply if the sale is due to, or made in anticipation of, certain life events, such as death, a serious illness, involuntary termination of employment or a threat to personal safety. It also does not apply if the sale is due to the breakdown of your marriage or common-law partnership and you have lived separate and apart for at least 90 days before the sale. These exceptions have detailed definitions, so confirm how they apply to you with a lawyer or accountant.

Is claiming CCA worth it?

CCA reduces your rental income now, but it can come back as recapture when you sell. Whether it pays off depends on your income, how long you hold the property and what it sells for. Because CCA cannot create or increase a rental loss, it may not help in every year.

• Gather your T776 forms and CCA schedules for every year you owned the property.
• Find the class's UCC and the property's ACB.
• Estimate sale proceeds and selling costs.
• Note any years when the property's use changed, such as moving out and renting it.
• Ask an accountant to model recapture and capital gain before you list the property.

If the property was bought or sold in a foreign currency, convert the proceeds to Canadian dollars at the exchange rate in effect at the time of the sale, the cost base at the rate on the purchase date, and expenses at the rate when they were incurred.

Frequently asked questions