How much capital gains tax do you pay on investment property in Canada?

You pay tax on 50% of the capital gain (for gains up to $250,000) or 66.67% (for gains above $250,000) at your marginal tax rate. For example, if you sell a rental property for a $300,000 gain and your marginal rate is 43%, you would pay roughly $68,335 in tax: ($250,000 × 50% × 43%) + ($50,000 × 66.67% × 43%). The principal residence exemption does not apply to investment property.

Can you defer capital gains on investment property in Canada?

Unlike the U.S. 1031 exchange, Canada does not have a general tax-deferred exchange provision for real estate. However, you can defer gains by: (1) using a reserve if the buyer pays over multiple years (up to 5 years); (2) transferring to a spouse at adjusted cost base on death or during lifetime; (3) contributing to a spousal RRSP to offset the gain in the year of sale; or (4) timing the sale to occur in a low-income year.

What is CCA recapture and how does it affect selling a rental property?

If you claimed Capital Cost Allowance (CCA) on a rental property to reduce rental income taxes, you must "recapture" that deduction when you sell. The CCA recapture amount is added to your income as regular income (100% taxable, not at the capital gains rate). For example, if you claimed $40,000 in CCA over the years, that $40,000 is added to your income in the year of sale on top of any capital gain.

How do you calculate the adjusted cost base for a rental property?

The adjusted cost base (ACB) includes: the original purchase price + land transfer tax + legal fees on purchase + capital improvements (new roof, addition, renovation) + costs of acquisition (appraisal for purchase). It does NOT include: regular repairs and maintenance, property management fees, mortgage interest, insurance, or property taxes. These are operating expenses deducted against rental income, not added to ACB.

Capital Gains Tax on Investment Property in Canada

Investment property does not qualify for the principal residence exemption. When you sell, you owe capital gains tax — and potentially CCA recapture — on the profit. Here is how to calculate what you owe, what reduces the bill, and how to plan the sale.

How capital gains tax works on investment property

When you sell a rental or investment property:

Step	Calculation
1. Determine proceeds	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% on first $250K of gain; 66.67% on amounts above $250K
5. Add to income	Included amount is taxed at your marginal rate

Worked example: selling a rental condo

Item	Amount
Original purchase price (2015)	$350,000
Land transfer tax	$5,525
Legal fees on purchase	$1,500
Kitchen renovation (2018)	$25,000
Adjusted cost base	$382,025
Sale price (2025)	$625,000
Real estate commission (5%)	$31,250
Legal fees on sale	$1,500
Proceeds of disposition	$592,250
Capital gain	$210,225
Taxable amount (50% inclusion)	$105,113
Tax at 43% marginal rate	~$45,198

CCA recapture: the hidden tax bill

If you claimed Capital Cost Allowance (CCA) on the rental property to reduce your rental income tax over the years, you face CCA recapture on sale.

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 you sell for more than UCC, the difference (up to original cost) is added to income as regular income
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 the capital gain. In this example, the total tax impact of selling is the $45,198 capital gains tax plus $17,200 CCA recapture = $62,398.

Should you claim CCA? Many landlords deliberately avoid claiming CCA 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	If spouse has a lower income, contribute to spousal RRSP to shift the deduction	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	Exempt portion = (1 + years designated) ÷ years owned
Transfer to spouse on death	Assets transferred to spouse at ACB on death — no immediate tax	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
CRA’s expectation	Allocation should reflect fair market values — typically based on municipal assessment ratios

Multiple investment properties

If you own several investment properties, each is treated independently:

Rule	Detail
Gains and losses can offset each other	A loss on one property can offset a gain on another in the same year
Capital losses carry forward indefinitely	Unused losses from a prior year can offset future gains
Capital losses carry back 3 years	You can apply current-year losses against gains from the past 3 years
Each property’s ACB is tracked separately	Improvements to one property only increase that property’s ACB

Holding investment property in a corporation

Pros	Cons
Lower initial tax rate on rental income (~50% combined in a corporation on passive income)	Capital gains inside a corporation are taxed at ~50% (passive investment income rate)
Can retain earnings for reinvestment	No principal residence exemption available
Limited liability	Additional costs: legal setup, accounting, corporate tax returns
Estate planning flexibility	Double taxation on extraction (corporate tax + personal tax on dividends)
	Lifetime capital gains exemption not available for rental property

Generally: Holding rental property personally is simpler and often more tax-efficient for 1–3 properties. Corporations make more sense for larger portfolios (4+ properties) or for liability protection.

Non-resident sellers

If you are a non-resident selling Canadian real estate:

Requirement	Detail
Buyer must withhold 25% of sale price	Under Section 116 of the Income Tax Act
Seller obtains a Certificate of Compliance	Apply to CRA before or shortly after closing
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)	Report CCA recapture in the year of sale
Form T2091	Only if claiming partial principal residence exemption
T1 General (Line 12700)	Net capital gains added to total income