This page covers the tax an investor pays when selling a rental or other investment property: the capital gain, recapture of any depreciation claimed, and the planning moves that change the bill. It is part of WealthNorth’s guide to investment property financing. Investment property doesn’t qualify for the principal residence exemption, except for years you lived in it. The full tax rules for selling a rental are in capital gains on rental property, and the capital gains tax calculator estimates the tax for your province and income.
How capital gains tax works on investment property
When you sell a rental or investment property:
| Step | Calculation |
|---|---|
| 1. Determine proceeds net of selling costs | Sale price − real estate commission − legal fees |
| 2. Determine adjusted cost base (ACB) | Purchase price + land transfer tax + legal fees + capital improvements |
| 3. Calculate capital gain | Proceeds − ACB |
| 4. Apply inclusion rate | 50% of the gain is included in income |
| 5. Add to income | Included amount is taxed at your marginal rate |
Fees for arranging the mortgage, including the lender’s appraisal, are financing fees deducted from rental income over several years, not added to the ACB.
Worked example: selling a rental condo
| Item | Amount |
|---|---|
| Original purchase price (2015) | $350,000 |
| Land transfer tax (Ontario) | $3,725 |
| Legal fees on purchase | $1,500 |
| Kitchen renovation (2018) | $25,000 |
| Adjusted cost base | $380,225 |
| Sale price (2025) | $625,000 |
| Real estate commission (5%) | $31,250 |
| Legal fees on sale | $1,500 |
| Proceeds after selling costs | $592,250 |
| Capital gain | $212,025 |
| Taxable amount (50% inclusion) | $106,013 |
| Tax at an assumed 43% marginal rate | ~$45,585 |
CCA recapture: the hidden tax bill
If you claimed capital cost allowance (CCA) on the building to reduce tax on rental income over the years, part or all of it is recaptured when you sell the building for more than its undepreciated capital cost. Whether claiming CCA is worth it in the first place is covered in should you claim CCA on a rental.
| Concept | Explanation |
|---|---|
| CCA claimed | Depreciation deductions you took against rental income (usually 4% per year on the building, not land) |
| UCC (Undepreciated Capital Cost) | Original building cost minus total CCA claimed |
| Recapture | If the proceeds from the property you sell are more than the undepreciated capital cost (UCC) of its class, the difference is recaptured CCA, added to your income in full rather than at the capital gains inclusion rate. The proceeds counted are the lower of the sale price (minus selling costs) and the property's original capital cost, so the recapture can't be more than the CCA claimed. |
| Tax rate on recapture | Your marginal income tax rate (NOT the capital gains rate): 100% taxable |
CCA recapture example
| Item | Amount |
|---|---|
| Building portion of original cost | $250,000 |
| CCA claimed over 10 years | $40,000 |
| UCC at time of sale | $210,000 |
| Building portion of sale price | $375,000 |
| CCA recapture (capped at CCA claimed) | $40,000 |
| Tax on recapture at 43% marginal rate | $17,200 |
| Capital gain on building | $375,000 − $250,000 = $125,000 |
Important: The CCA recapture is taxed as ordinary income on top of any capital gain from the sale. The two examples above use different sample properties to illustrate each calculation separately, but on an actual sale both taxes would apply to the same transaction and add together (in the recapture example, $17,200 in recapture tax would be owed in addition to whatever capital gains tax applies to that property’s gain).
Should you claim CCA? CCA is optional, and some landlords skip it to avoid recapture on sale. The decision depends on your current vs. expected future marginal tax rate and how long you plan to hold the property.
Reducing your capital gains tax (legally)
| Strategy | How It Works | Potential Savings |
|---|---|---|
| Maximize your ACB | Track every capital improvement: renovation receipts, legal fees, surveys, appraisals at purchase | Reduces gain dollar-for-dollar |
| Time the sale | Sell in a year when your other income is low (sabbatical, retirement, between jobs) | Lower marginal rate on the included gain |
| RRSP contribution | Contribute to RRSP in the year of sale to offset income (if you have contribution room) | Tax deduction offsets some of the gain |
| Spousal RRSP | You deduct the contribution in the year of the sale, and later withdrawals are taxed to your spouse (unless you contributed in the year of withdrawal or the 2 years before) | Optimizes household tax |
| Capital gains reserve | If buyer pays over multiple years, spread the gain recognition over up to 5 years | Keeps you in a lower bracket each year |
| Principal residence exemption (partial) | If you lived in the property for some years, you can designate those years under the PRE | The exempt part of the gain is the number of years designated (years you were resident in Canada), plus one if you were resident in Canada in the year you bought it, divided by the number of years you owned it. |
| Transfer to spouse on death | Capital property, including a rental property or company shares, that passes at death to a spouse or common-law partner resident in Canada, or to a qualifying spousal trust, is transferred at its tax cost (adjusted cost base, or for a building the lower of its capital cost and undepreciated cost), so no gain or recapture is taxed until the spouse sells, unless the executor elects out. | Defers gain until spouse sells |
| Donate to charity | Donating appreciated real estate can generate a donation tax credit | Complex: consult a tax professional |
Land vs. building allocation
When you buy investment property, you must allocate the purchase price between land (not depreciable) and building (depreciable for CCA). This allocation also affects capital gains:
| Consideration | Impact |
|---|---|
| Higher building allocation | More CCA available (reduces rental income tax), but more CCA recapture on sale |
| Higher land allocation | No CCA available, but no recapture on sale |
| Basis for the split | Allocation should reflect the land’s and building’s fair market values at purchase; keep evidence of those values, such as an appraisal |
Multiple investment properties
If you own several investment properties, each is treated independently:
| Rule | Detail |
|---|---|
| Gains and losses can offset each other | An allowable capital loss is applied first against your taxable capital gains of the same year. Selling a building for less than its cost gives no capital loss; the loss can only be a terminal loss. |
| Unused capital losses | What is left (a net capital loss) can reduce taxable capital gains in any of the three years before, or in any future year. A net capital loss usually can only be applied against taxable capital gains, not other income. |
| Each property’s ACB is tracked separately | Improvements to one property only increase that property’s ACB |
How to apply a net capital loss, from the CRA’s Guide T4037:
- To carry a loss back or forward, complete Schedule 3 and attach it to your return, so the CRA's records show the loss.
- To apply a loss to an earlier year, use Form T1A, Request for Loss Carryback; don't file an amended return for that year.
- Net capital losses of earlier years are applied before those of later years.
- A loss carried to a year with a different inclusion rate is adjusted to that year's rate.
- Applying a net capital loss lowers taxable income but not net income, which is what many credits and benefits are based on.
Holding investment property in a corporation
In a corporation, the same 50% of the gain is taxable, at the corporate rate on investment income (part of which is refundable when dividends are paid). A private corporation's capital dividend account tracks tax-free amounts, mainly the non-taxable part of its capital gains (net of the non-deductible part of its capital losses), life insurance proceeds on certain policies and capital dividends received from other corporations; the corporation can pay the balance to its Canadian-resident shareholders as tax-free capital dividends by filing an election on Form T2054 by the day the dividend becomes payable or is first paid, whichever is earlier. Whether that beats personal ownership depends on the size of the portfolio, how the income is used and the extra costs; see real estate investing in a corporation.
Non-resident sellers
If you are a non-resident selling Canadian real estate:
| Requirement | Detail |
|---|---|
| Buyer can be liable for part of the price | Under section 116 of the Income Tax Act, unless the CRA issues a certificate of compliance the buyer can be liable for 25% of the price, or 50% for depreciable property such as a rental building (CRA Information Circular IC72-17R6) |
| Seller obtains a Certificate of Compliance | Notify the CRA (Form T2062) before the sale or no later than 10 days after it |
| File a Canadian tax return | Report the gain and any tax withheld; claim treaty benefits if applicable |
| May be eligible for reduced withholding | If applying for the certificate before closing and CRA processes in time |
Tax reporting forms
| Form | Purpose |
|---|---|
| Schedule 3 (Capital Gains) | Report the disposition and calculate the gain |
| Form T776 (rental income; see how rental income is taxed) | Report CCA recapture in the year of sale |
| Form T2091(IND) | Required whenever you designate a property as your principal residence (page 1 only if it was your principal residence for all years, or all but one) |
| T1 General (Line 12700) | Net capital gains added to total income |
Related pages
Sources
The figures and rules on this page come from these sources, last checked against them between September 23, 2026 and October 1, 2026. How we check facts.
- Canada Revenue Agency: Capital Gains – 2025
- Canada Revenue Agency: Rental Income
- Canada Revenue Agency: Procedures concerning the disposition of taxable Canadian property by non‑residents of…
- Canada Revenue Agency: RRSPs and Other Registered Plans for Retirement
- Canada Revenue Agency: Principal residence
- Canada Revenue Agency: Income Tax Folio S1-F3-C2, Principal Residence
- Canada Revenue Agency: Income Tax Folio S3-F2-C1, Capital Dividends
- Government of Ontario: Calculating Land Transfer Tax | Land Transfer Tax
- Justice Laws (Canada): Income Tax Act