How is capital gain calculated on a rental property?

Your capital gain is the sale price minus your adjusted cost base (ACB) minus selling costs. The ACB is the original purchase price plus capital improvements made over ownership. A portion of the gain is then included in income based on the capital gains inclusion rate.

What is the capital gains inclusion rate for rental property in Canada?

As of 2024, the inclusion rate is 50% on the first $250,000 of capital gains per year and 66.67% on amounts above $250,000. The included amount is added to your income and taxed at your marginal rate. Prior to June 25, 2024, the inclusion rate was 50% on all gains.

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

If you claimed Capital Cost Allowance (CCA) on your rental property and then sell for more than the undepreciated capital cost (UCC), the difference is "recaptured" and added to your income as ordinary income — not capital gains. Recaptured CCA is taxed at full marginal rates, not at the capital gains inclusion rate. This is often the most expensive tax surprise on a rental property sale.

Can I claim the principal residence exemption on a rental property?

Partially, if you lived in the property as your principal residence for some years. You can designate the years you personally lived in it to the PRE, and the remaining years create a taxable gain. You can only designate one property as your principal residence per year and cannot retroactively claim PRE if you never lived there.

What selling costs can I deduct from the capital gain?

Selling costs that directly relate to the disposition reduce your proceeds of disposition (and therefore your capital gain). These include: real estate commissions, legal fees for the sale, mortgage discharge penalties, advertising costs, and any costs of fixing up the property for sale that are capital in nature.

Is there a way to defer capital gains tax on a rental property sale?

Options to defer or reduce capital gains on a rental property include: selling in a lower-income year to reduce marginal rate on the included gain, installment sale over multiple years (structured through a vendor take-back mortgage), spousal rollover at ACB (not a sale — a transfer), or charitable donation (donating appreciated property). There is no equivalent of a 1031 exchange in Canada.

Capital Gains on Rental Property Canada: 2026 Guide

Short Answer

Selling a rental property in Canada triggers capital gains tax on the appreciation and potentially recapture of CCA previously claimed. The after-tax proceeds depend heavily on your ACB (adjusted cost base) — which is why tracking every capital improvement from the day you buy is essential.

Step 1: Calculate Your Adjusted Cost Base (ACB)

The ACB is never just the purchase price:

ACB component	Include?
Purchase price	Yes
Legal fees on purchase	Yes
Land transfer tax	Yes
Home inspection, survey fees	Yes
Capital improvements (new roof, addition, HVAC system)	Yes — each one adds to ACB
CMHC insurance premium (if financed)	Yes
Routine repairs and maintenance	No — already expensed
CCA claimed on the building	No — reduces UCC, not ACB

Example ACB calculation:

Item	Amount
Purchase price (2015)	$450,000
Legal fees + LTT	$8,500
Kitchen renovation (2018)	$22,000
Roof replacement (2021)	$18,000
New windows (2023)	$12,000
Adjusted Cost Base	$510,500

Step 2: Calculate the Capital Gain

Step	Calculation
Proceeds of disposition (sale price)	$780,000
Minus selling costs (commissions + legal)	($32,000)
= Net proceeds	$748,000
Minus ACB	($510,500)
= Capital gain	$237,500

Step 3: Apply the Inclusion Rate

As of the 2024 tax changes:

Gain amount	Inclusion rate	Taxable income added
First $250,000	50%	$237,500 × 50% = $118,750
Above $250,000	66.67%	— (gain below this threshold)

The $118,750 is added to your income and taxed at your marginal rate.

At 43.41% marginal rate: Tax = $118,750 × 43.41% = ~$51,550

CCA Recapture: The Hidden Tax Cost

If you claimed CCA on the building, selling for more than the undepreciated capital cost (UCC) triggers recapture:

Building details	Amount
Original building value at purchase	$380,000
CCA claimed over ownership (Class 1, 4%)	$57,000
Undepreciated capital cost (UCC) at sale	$323,000
Proceeds allocated to building (not land)	$600,000
CCA recapture	$600,000 − $323,000 = $277,000

Recapture is taxed as ordinary income — not as a capital gain. At 43% marginal rate, a $277,000 recapture = ~$119,000 in tax. This is in addition to capital gains tax on the appreciation.

This is why many tax advisors recommend not claiming CCA unless you are in a low-income year, plan to sell in an even lower-income year, or need it to offset losses.

Principal Residence Exemption (Partial)

If you ever lived in the rental property as your principal residence:

Formula	(1 + Number of years designated as PRE) ÷ Total years owned × Capital gain = Exempt amount

Example: Owned 10 years. Lived there for 3 years, rented for 7. Capital gain: $250,000.

PRE formula: (1 + 3) ÷ 10 × $250,000 = $100,000 exempt
Taxable gain: $250,000 − $100,000 = $150,000

The “plus 1” in the formula is built in to account for years where you transition between principal residence and rental use.

Important: If you converted your home to a rental, CRA deemed you to have sold it at fair market value at the conversion date. The gain from ownership to conversion is calculated separately from the gain after conversion (see the companion article on converting a primary residence to rental).

Strategies to Reduce Capital Gains on Sale

Strategy	How it works	Best for
Maximize ACB tracking	Every capital improvement increases ACB and reduces gain	All rental property owners
Sell in a low-income year	Marginal rate on the included gain is lower	Near retirement, career transition
Capital losses to offset gains	Losses from other investments in the same year offset gains	Those with portfolio losses
Spousal rollover	Transfer to spouse at ACB — no immediate tax	Estate planning, not a cash-out
Charitable donation of property	Some donation structures can reduce tax on appreciated property	Philanthropic situations

Filing: What Forms You Need

Form	Purpose
Schedule 3 (Capital Gains or Losses)	Report the capital gain from the sale
T776 (Statement of Real Estate Rentals)	CCA recapture calculation and final year rental income
T1 General	Capital gain and recapture flow to T1 income

Bottom Line

Capital gains tax on a rental property sale combines the capital gain on appreciation with recapture of any CCA claimed — and you must calculate both. Tracking your ACB from the purchase date (including every capital improvement) is the most reliable way to minimize taxable gain. Consult a tax professional before selling, particularly if the property has significant appreciation or a large CCA balance.

→ Back to: Complete Canadian Tax Guide