Is Selling a Rental Property Subject to Capital Gains Tax in Canada?

Selling a rental property often produces the largest single tax bill a landlord ever faces. The sale is generally a disposition of capital property, so the question is how big the gain is, how much of it is taxed, and which year it lands in.

This article walks through the basic calculation, the reporting steps, and the points that commonly trip up landlords. It is general information, and the details of your property, your ownership history and your earlier tax claims can change the result.

This article covers Canadian federal tax law, which applies in every province.

How the gain on a rental property is calculated

The gain is the proceeds of disposition, minus the adjusted cost base (ACB) of the property, minus the outlays and expenses of selling. The CRA illustrates the method with shares: proceeds of $6,500, a $60 commission and a $4,000 ACB give a gain of $2,440, and half of that, $1,220, is the taxable capital gain.

For property other than depreciable property, the ACB is generally its cost adjusted under section 53 of the Income Tax Act. For depreciable property it is generally the capital cost, and it can never be negative. Which of these applies to your property, and how earlier tax claims on it affect the result, depends on your situation, so it is worth confirming with an accountant.

If you sell only part of a property, the ACB is divided between the part you sell and the part you keep.

How much of the gain is taxed

Under the Income Tax Act, the taxable capital gain is one-half of the capital gain. The proposed increase to two-thirds was cancelled, so the one-half rate applies to gains realized in 2024, 2025 and 2026.

The taxable amount is not taxed at a separate flat rate. If your taxable capital gains exceed your allowable capital losses, the difference goes on line 12700 of your T1 return, is added to your other income, and is taxed at your marginal rates. A large gain in one year can therefore push more of your income into a higher bracket.

The principal residence exemption and rental use

If any part of the sale is treated as a sale of your principal residence, that claim has to be reported on your return. A property that you rent out is a different situation, and whether any part of it can be designated as your principal residence depends on how it was used over the years you owned it. That is worth confirming with an accountant before you assume anything.

If you sold, or are considered to have sold, your principal residence or part of it, you include Form T2091(IND) with your return and report the sale on Schedule 3. Since 2016 the exemption is allowed only if the disposition and designation are reported on the return, and a late designation may attract a penalty.

Other points that change the result

• Capital cost allowance: if you claimed depreciation on the building in earlier years, how that affects the tax on the sale depends on your claims and the sale price, so have an accountant run the numbers.
• Short ownership: a gain on a Canadian housing unit owned for less than 365 consecutive days is deemed to be business income, not a capital gain, and is reported in Part 1 of Schedule 3.
• Life events: that flipped-property rule does not apply where the sale is due to a qualifying life event, such as death, relationship breakdown (at least 90 days of separation), serious illness or involuntary job termination.
• Trading versus investing: the CRA's audit manual treats the question as whether the taxpayer is trading or investing, a short holding period alone is not conclusive, and a gain from a carried-out intention to resell at a profit is usually business income.
• Sale to a relative: if you sell to a non-arm's length person for less than fair market value, your proceeds are considered to be the fair market value.
• Spreading the gain: if part of the price is payable after year-end, you may be able to claim a reserve on Form T2017, generally for a maximum of four years after the year of sale.

What to do next

• Find the purchase documents to establish the original cost and the legal fees and commission paid to acquire the property.
• Collect the sale statement showing proceeds and the selling costs.
• List the capital cost allowance you claimed in past years.
• Report the sale in Part 3 of Schedule 3 for the calendar year of the sale, unless the flipped-property rule applies, in which case the gain is reported in Part 1 of Schedule 3, and file a return even if no tax is owing.
• Ask an accountant or tax lawyer to confirm the gain, any recapture and any reserve before you file.

Frequently asked questions