Capital gains tax on a rental property in Canada
The tax bill when you sell is set by four rules: the 50% inclusion rate, CCA recapture, the principal residence exemption formula, and the 365-day flipping rule. Here is each one with real numbers for 2026. Education, not tax advice; confirm your own sale with an accountant before you list.
The 50% inclusion rate, and the increase that never happened
When you sell a rental for more than it cost you, the profit is a capital gain and half of it is added to your income for the year. That half is taxed at your marginal rate alongside your salary and rental income; the other half is yours tax-free. Budget 2024 proposed raising the inclusion rate to two-thirds on an individual's gains above $250,000 a year. The start date was pushed to January 1, 2026, and on March 21, 2025 the federal government cancelled the increase entirely. For 2026 the rate is 50% on every dollar of gain, with no $250,000 tier. The lifetime capital gains exemption does not help here: it covers qualified small business shares and farm or fishing property, never a rental.
A worked sale
Your gain is not sale price minus purchase price. It is net proceeds (after commission and legal fees on the sale) minus your adjusted cost base, which is the purchase price plus land transfer tax, legal fees on purchase, and every capital improvement you kept a receipt for. A landlord who bought at $500,000 and sold ten years later at $780,000, having claimed $40,000 of CCA along the way, would see something like this in a 45% marginal bracket:
Two things stand out. Recapture is the expensive line: the $40,000 of CCA is taxed in full, not at 50%, which is why the decision to claim CCA is really a decision about your tax rate today versus your rate in the year you sell. And the $8,000 of land transfer tax and legal fees, plus the $22,000 of improvements, cut the taxable gain by $15,000. Land transfer tax is never deductible against rent, so this is the only place you recover it; our land transfer tax calculator gives the exact figure for your province.
The principal residence exemption formula
If you ever lived in the property, part of the gain can be sheltered, and the CRA prorates it by tax years rather than by appraised value. The exempt share of the gain is:
(years designated as principal residence + 1) ÷ years owned
The "plus one" exists so that a family selling one home and buying another in the same year is not taxed on either. It applies as long as you were a Canadian resident in the year you bought. Every year counts as a full year, whether you owned the property for one day or 365 of it, and you can designate only one property per family per year.
Take a condo bought in 2017, lived in through 2020, rented from 2021, and sold in 2026. That is ten tax years of ownership and four designated years, so (4 + 1) ÷ 10 = 50% of the gain is exempt, and the other half goes through the 50% inclusion calculation above. The exemption is not a flat "lived there once, all tax-free" rule, and it is not measured by how much the property was worth on moving-out day.
Two elections stretch the designated years. A subsection 45(2) election, filed with the return for the year you moved out and started renting, lets you keep designating the property for up to four more years while it is rented (longer if an employer moved you 40 km or more). In the example above it lifts the exempt share to (4 + 4 + 1) ÷ 10 = 90%. A subsection 45(3) election does the reverse when you move into a former rental, reaching back up to four rental years. Both elections die the moment you claim CCA on the property, and both require that you not designate another home for those years. Since 2016 you must report every principal residence sale on Schedule 3 and form T2091 to claim any of this; an unreported sale can lose the exemption entirely.
The 365-day flipping rule
Since January 1, 2023, profit on a residential property owned for fewer than 365 consecutive days is deemed business income: 100% taxable, no capital gains treatment, no principal residence exemption, and a loss is denied. The rule covers rentals and assignment sales of pre-construction units, not just fix-and-flip houses. The only way out is a listed life event that forced the sale:
- Death of the owner or a related person
- A new household member: birth, adoption, or taking in a parent or a person with a disability
- Breakdown of a marriage or common-law relationship, separated at least 90 days
- A threat to personal safety
- Serious illness or disability of the owner or a related person
- A work relocation of 40 km or more
- Involuntary loss of employment
- Insolvency
- Involuntary disposition: expropriation, fire, flood, or other disaster
Past 365 days the deeming rule switches off, but the CRA can still treat a short-hold sale as business income on the facts, looking at your intention at purchase, how long you held, and how often you do it. A BRRRR investor who refinances and keeps the property is fine; one who renovates and sells inside a year is not.
Timing the sale
The gain lands in the tax year the sale closes, not the year you sign. A seller expecting a low-income year (retirement, parental leave, a sabbatical) can save several percentage points by closing in that year. Co-owners each report their share, so a gain split between two spouses who both genuinely contributed capital is taxed in two lower brackets instead of one high one. If the buyer pays over more than one year, a capital gains reserve can spread the gain over up to five years. None of this changes recapture, which always lands in full in the year of sale.
Frequently asked questions
What is the capital gains inclusion rate in Canada in 2026?+
50%. The 2024 federal budget proposed raising it to two-thirds on gains above $250,000, the change was deferred to 2026, and then cancelled outright on March 21, 2025. It never took effect. Half of your capital gain is added to your income and taxed at your marginal rate; the other half is tax-free.
How much tax will I pay when I sell my rental property?+
Roughly half your gain multiplied by your marginal tax rate in the year of sale, plus your full marginal rate on any CCA you claimed over the years (recapture). On a $215,000 gain with $40,000 of CCA claimed, a seller in a 45% bracket pays about $48,000 on the gain and $18,000 on the recapture, so about $66,000 in total. Selling in a low-income year, or splitting the gain across two tax years with a closing date near year end, can lower the rate that applies.
Can I avoid capital gains tax by living in the rental before I sell?+
Only partly. The principal residence exemption is prorated by years: the exempt share of the gain is (years designated as your principal residence + 1) divided by total years owned. Moving in for one year on a property you owned for ten shelters 2 of 10 years, not the whole gain. A subsection 45(3) election can add up to four earlier rental years to the designation, but only if you never claimed CCA on the property.
Does the 365-day flipping rule apply to rental properties?+
Yes. Since January 1, 2023, profit on any residential property (including rentals and assignment sales) owned for less than 365 consecutive days is business income, fully taxable with no 50% inclusion and no principal residence exemption, unless one of the listed life events applies. Hold past the one-year mark and the ordinary capital gains treatment returns, though the CRA can still argue a short hold was a business venture on the facts.
Can I gift the rental to my children to avoid the tax?+
No. A gift is a deemed disposition at fair market value, so you pay the same capital gains tax and recapture as if you had sold it, and your child's cost base becomes that value. Transfers to a spouse roll over at cost with no tax that day, but the attribution rules send the future rental income and gain back to you.
What if I sell at a loss?+
A capital loss on a rental property offsets capital gains only, in the current year, the three previous years, or any future year. It cannot reduce salary or rental income. Separately, if the building portion sells for less than its undepreciated capital cost, the shortfall is a terminal loss, which is fully deductible against any income in the year of sale.
I am a non-resident selling Canadian property. What changes?+
You must apply for a section 116 clearance certificate before or within 10 days of the sale. Until it is issued, the buyer's lawyer holds back part of the price (typically 25%) to cover your Canadian tax. The gain itself is taxed the same way, and you file a Canadian return for the year of sale to settle the actual amount.
Related: how rental income itself is taxed, including the CCA decision, in our rental income tax guide, and the sales-tax side of renting in our GST/HST on rental income guide.