Selling a Rental Property in Canada: Capital Gains, Explained

This article is general information, not tax advice. The rules have edge cases and change; confirm your situation with a qualified accountant or the CRA before you sell.

Selling a rental property in Canada triggers more than a simple capital gain. There is the gain itself, a depreciation clawback that catches many landlords off guard, and separate rules if the property was ever your home or if you are a non-resident. Here is the whole shape of it, starting with the number everyone asks about.

The inclusion rate is 50% (ignore the "two-thirds" talk)

In Canada, one-half of a capital gain is taxable. When you sell a rental for more than it cost you, half of the gain is added to your income for the year and taxed at your marginal rate. That 50% inclusion rate is what applies for 2026.

You may remember talk of an increase. The 2024 federal budget proposed raising the inclusion rate to two-thirds on the portion of an individual's gains above $250,000. That proposal was deferred and then cancelled in March 2025, and never became law. So if you read older material describing a "$250,000 two-thirds tier starting in 2026," disregard it: the rate is 50%.

(One related change that did stick is the higher Lifetime Capital Gains Exemption, but note it applies only to qualifying small-business shares and farm or fishing property. It does not apply to rental real estate.)

How the gain is calculated

The capital gain is:

Proceeds of sale − (adjusted cost base + costs of selling).

• Proceeds are usually the selling price.
• Adjusted cost base (ACB) is what you paid, plus purchase costs (land transfer tax, legal fees on the purchase), plus any capital improvements made over the years.
• Costs of selling are things like the real estate commission, legal fees on the sale, and advertising.

The gain is reported on Schedule 3. Half of it is then taxable.

This is why the capital improvement versus repair distinction matters so much when you own a rental. A capital improvement (a new roof, an addition, replacing a major system) is added to your ACB and reduces the eventual gain. A current expense (patching, repainting, a minor fix that just restores the property) is instead deducted against your rental income in the year you spend it. Same receipt box, very different tax treatment, so keep them separated as you go.

The trap: CCA recapture

This is the part that surprises landlords, and it is worth understanding before you ever claim it.

Over the years, you can claim Capital Cost Allowance (CCA), a depreciation deduction on the building, to lower your taxable rental income. It feels like free tax savings. But when you sell, if the building's share of the proceeds is more than its depreciated value, the CRA recaptures that previously-claimed CCA: it is added back to your income and taxed as ordinary income at 100%, not as a capital gain at 50%.

In plain terms: the depreciation you claimed to shelter rental income gets clawed back, fully taxable, in the year you sell, on top of the capital gain. Only the building can be depreciated (land cannot), and recapture is reported on line 9947 of the T776. This is exactly why many advisors caution against claiming CCA on a rental property you expect to appreciate. If you have been claiming it, factor the recapture into your sale math.

If the property was ever your home

A property you only ever rented out does not qualify for the principal residence exemption, which is what shelters the gain on your own home. The exemption only covers the years a property was actually your principal residence, prorated over the years you owned it.

Two wrinkles worth knowing, both of which call for professional advice:

• Change of use is a taxable event. Converting your home into a rental, or a rental back into your home, triggers a deemed disposition at fair market value, a taxable moment even though you did not sell anything or receive any cash.
• Elections can defer it. Subsections 45(2) and 45(3) of the Income Tax Act let you elect to defer that deemed disposition and stretch the principal-residence designation. But there is a catch that ties back to the section above: these elections are not available if you claimed CCA on the property. Depreciation forecloses the deferral.

These rules have real edge cases. If your property was ever both a home and a rental, get advice before you sell.

If you are a non-resident

If you are a non-resident of Canada selling Canadian real estate, a separate regime under section 116 applies. You apply to the CRA for a certificate of compliance (Form T2062, and T2062A for the depreciable building portion). If a certificate is not obtained by closing, the buyer must withhold and remit a share of the purchase price (generally 25% of the gross, and more where recapture is involved) to the CRA. It is a process to start early, with professional help, not at the closing table.

Plan ahead, and keep the records

The landlords who are not surprised at sale time are the ones who kept the paper trail all along: the original purchase and its costs, every capital improvement receipt (which raises the ACB and lowers the gain), and a clear record of any CCA claimed. Reconstructing years of improvements from memory is where money is lost. Keeping that record per property is exactly what Habyn helps landlords do, and our guide to rental-property tax deductions covers the annual side.

Frequently asked questions

How much of my gain is taxed when I sell a rental? Half of it. The 50% inclusion rate applies for 2026; the proposed two-thirds rate on gains over $250,000 was cancelled and never became law.

What is CCA recapture? If you claimed depreciation (CCA) on the building, selling can claw it back as fully-taxable income (100%), separate from and on top of the capital gain. It is the most commonly overlooked cost of selling a rental.

Can I use the principal residence exemption on a rental? Only for the years the property was actually your principal residence. A property that was only ever a rental does not qualify.

Does converting my home to a rental trigger tax? It can. A change of use is a deemed disposition at fair market value, a taxable event even without a sale. Elections may defer it, but not if you claimed CCA, so get advice first.

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Selling well starts years earlier, with clean records of what you paid, what you improved, and what you claimed. Habyn keeps that history per property so a sale is a calculation, not an archaeology dig. See how Habyn helps landlords.