This guide is general information for educational purposes only. It is not legal, tax or financial advice. Speak with a qualified lawyer, accountant or tax professional about your situation.
Canada taxes one-half of a capital gain on investment property. How ACB, CCA recapture, the 365-day flipping rule and change in use work, with an example.
This guide is for Toronto owners of rental condos, pre-construction units and second homes asking one question before they sell: how much of my profit is taxed? The short answer: in Canada, one-half of a capital gain on investment property is added to your income and taxed at your marginal rate. The proposed increase to two-thirds was cancelled.
Two other rules matter. CCA claimed on a rental building may be recaptured on sale, with the recaptured amount fully taxable, and profit on Canadian housing held for less than 365 days is generally taxed as business income in full. I walk through each rule below, with a worked example using the current inclusion rate.
What is the capital gains tax rate on investment property in Canada?
There is no separate capital gains tax. Instead, a share of your gain, called the inclusion rate, is added to your taxable income for the year. Under section 38 of the Income Tax Act, a taxable capital gain is one-half of the capital gain.
That half is then taxed with your salary and other income, at whatever federal and Ontario bracket it falls into. Your real cost therefore depends on your other income in the year of sale, which makes closing dates worth discussing with your accountant before listing.
What happened to the two-thirds inclusion rate?
In 2024 the federal government proposed raising the inclusion rate from one-half to two-thirds on annual gains above $250,000 for individuals, and on all gains of corporations and most trusts. In January 2025 the Department of Finance deferred the start to January 1, 2026.
On March 21, 2025, the Prime Minister's Office announced the government would cancel the proposed hike. The one-half rate in section 38 still applies. If your listing decision assumed the higher rate was coming, revisit that assumption.
How is a capital gain on a rental property calculated?
The CRA's Capital Gains guide (T4037) uses three numbers:
- Proceeds of disposition: usually the sale price.
- Adjusted cost base (ACB): what the property cost you, plus purchase expenses such as commissions and legal fees, plus the cost of additions and improvements.
- Outlays and expenses: costs of selling, such as the listing commission and legal fees on the sale.
Your capital gain is the sale price minus the ACB and the selling costs. Then one-half of that gain is added to your income.
Why does ACB record-keeping matter?
Eligible capital improvement costs increase your ACB and reduce your gain. Routine repairs and maintenance do not. The CRA's definitions page includes additions and improvements in the cost of a property. Keep a single file of invoices from the day you close.
What is capital cost allowance recapture?
Capital cost allowance (CCA) is the tax version of depreciation. It allows deductions for part of a building's capital cost. Under the Income Tax Regulations, the basic Class 1 CCA rate is 4% on a declining balance, subject to special rules and allowances.
The CRA's Rental Income guide (T4036) notes that a rental building may fall in Class 1 or several other classes, depending on its construction and purchase date.
Some practical points from the T4036 guide:
- Land is not depreciable, so only the building portion of the price qualifies.
- You cannot use CCA to create or increase a rental loss.
- CCA is optional. You can claim anything from zero to the maximum.
The catch comes on sale. For a building in its own class, net sale proceeds above its undepreciated capital cost (UCC) can trigger recapture, up to the CCA previously claimed. Under subsection 13(1), that amount is included in income in full, not at one-half.
Generally, a rental building acquired after 1971 with a capital cost of $50,000 or more belongs in a separate CCA class under regulation 1101(1ac). For a building in a separate class, other rental buildings do not offset its recapture.
Does the principal residence exemption apply to an investment property?
The principal residence exemption can remove tax on the gain from selling your home. According to the CRA's principal residence page, a family can designate only one home as its principal residence for each year (from 1982 on). A unit used solely as a rental, with no qualifying residential use or election, does not qualify.
For an owner resident in Canada throughout ownership, the exempt share generally follows a formula in paragraph 40(2)(b): one plus the number of years designated, divided by the number of years owned.
Assume a qualifying cottage owned for ten tax years by a Canadian resident throughout, with six years designated and no other adjustments. Seven-tenths of the gain is exempt. On a $500,000 gain, $150,000 remains, and $75,000 of that is taxable.
You must report the sale and the designation on Schedule 3 and Form T2091(IND), even when the full gain is exempt. The CRA says it can accept a late designation in certain circumstances, but a penalty may apply.
What happens when I rent out my home, or move into my rental?
A complete change in use generally triggers a deemed sale unless an applicable election is made. When you turn your home into a rental, the CRA considers you to have sold it at fair market value and immediately bought it back. That can trigger a gain even though no money changed hands.
A subsection 45(2) election can defer that deemed disposition. While it is in force, you cannot claim CCA and must still report net rental income. You can generally designate the property as your principal residence for up to four rental years if you remain a Canadian resident and your family does not designate another home for those years.
The reverse move (a rental becoming your home) has a subsection 45(3) election. Prior CCA deductions for tax years after 1984 can prevent it. The deadline is the earlier of 90 days after a CRA request and the return filing deadline for the year of actual sale. Discuss eligibility with your accountant when the use changes.
What is the residential property flipping rule?
Under the flipping rule, any gain on a housing unit in Canada, including a rental property, that you owned for less than 365 consecutive days is generally deemed to be business income and not a capital gain. The rule applies to dispositions on or after January 1, 2023, as enacted in the Fall Economic Statement Implementation Act, 2022.
Business income is fully taxable, so the one-half inclusion rate does not apply. Subsection 12(12) also applies regardless of the principal residence exemption. The definition in subsection 12(13) covers a right to acquire a housing unit. That can capture a pre-construction assignment sold within 365 days of acquiring the right.
Exceptions require the sale to occur because of, or in anticipation of, a listed life event. Examples include death, marriage breakdown after at least 90 days living apart, involuntary employment termination or an eligible relocation.
Holding past 365 days is not a guarantee either. The CRA says that for other sales, business income or capital gain "depends on the specific details of the situation." I cover the current assignment market in Pre-Construction in 2026: Distress, Assignments, and the Bill C-4 Reset.
How would a Toronto rental condo sale be taxed?
Assume an investor bought a hypothetical $1,000,000 Toronto condo in 2016 and paid $40,000 in total purchase costs, including land transfer taxes and legal fees. They rented it out and claimed $90,000 of CCA over the years. In 2026 they sell for $1,350,000 and pay $55,000 in commission and legal fees.
Assume a capital property sale with no principal residence exemption or other adjustments. Allocate costs and proceeds reasonably between land and building, with each portion's net proceeds exceeding its original cost. The building is in its own CCA class, so all $90,000 of CCA is recaptured.
| Item | Amount | Tax treatment |
|---|---|---|
| Sale price | $1,350,000 | Proceeds |
| Selling costs | ($55,000) | Deducted |
| ACB (price plus purchase costs) | ($1,040,000) | Deducted |
| Capital gain | $255,000 | One-half included |
| Taxable capital gain | $127,500 | Added to income |
| CCA recapture | $90,000 | Fully added to income |
| Total added to income | $217,500 | Taxed at marginal rates |
The $90,000 of CCA reduced taxable rental income in earlier years and is now included in income in the sale year. The tax rate may differ. If instead a unit were sold after 300 days in a sale subject to the rule from 2023 onward, with no life-event exception, its profit would be business income.
When assessing a rental purchase, model the after-tax exit alongside the yield. Where CCA will be fully recaptured, treat it as a deferral and compare the tax rates in the deduction and sale years.
What this means for you
Luxury buyers: if you plan to rent your current home rather than sell it when you upsize, plan the 45(2) election before the tenant moves in. My thinking on that move is in The Condo-to-Freehold Spread.
Investors: model capital property exits using the one-half inclusion rate, any CCA recapture and selling costs. For pre-construction, check the dates on an assignment against the 365-day rule before you price it. My view on investor exits is in Investor Liquidation and the End-User Calculus.
Rental owners: keep a clean record of the land and building split, CCA claimed by year, and every capital improvement. Those records drive both the gain and the recapture. A large recapture in a year with other high income can raise the tax cost.
Ownership structure, timing and elections interact. Your accountant and lawyer should review the details before you sign a listing or an assignment.
Frequently asked questions
Is the capital gains inclusion rate in Canada one-half or two-thirds?
One-half. The government announced cancellation of the proposed increase to two-thirds on March 21, 2025, and section 38 of the Income Tax Act still sets the taxable portion at one-half.
Do I pay capital gains tax on a rental property I never lived in?
Generally, yes. A property used solely as a rental, with no qualifying residential use or election, does not qualify for the principal residence exemption. For a capital property sale, one-half of its gain is included in income; a business income sale is fully taxable.
Is CCA recapture taxed as a capital gain?
No. Recaptured CCA is included in income in full under subsection 13(1). Only the amount by which the sale price exceeds the adjusted cost base and selling costs is a capital gain.
Does the flipping rule apply to pre-construction assignments?
It can. The rule covers a right to acquire a Canadian housing unit held for less than 365 consecutive days, unless the sale meets a listed life-event exception.
Sources
- Income Tax Act, section 45 (Justice Laws Website, Government of Canada)
- Fall Economic Statement Implementation Act, 2022, section 2 (Justice Laws Website, Government of Canada)
- Income Tax Act, section 38 (Justice Laws Website, Government of Canada)
- Income Tax Act, section 40 (Justice Laws Website, Government of Canada)
- Income Tax Act, section 12 (Justice Laws Website, Government of Canada)
- Income Tax Act, section 13 (Justice Laws Website, Government of Canada)
- Income Tax Regulations, section 1100 (Justice Laws Website, Government of Canada)
- Income Tax Regulations, section 1101 (Justice Laws Website, Government of Canada)
- Prime Minister Carney cancels proposed capital gains tax increase (Prime Minister's Office, March 21, 2025)
- Deferral in implementation of change to capital gains inclusion rate (Department of Finance Canada, January 31, 2025)
- Capital Gains guide (T4037) (Canada Revenue Agency)
- Rental Income guide (T4036) (Canada Revenue Agency)
- Definitions for capital gains (Canada Revenue Agency)
- Principal residence and other real estate (Canada Revenue Agency)
- Budget 2022: Tax Measures, Supplementary Information (Department of Finance Canada)