Capital Gains When Selling a Rental Property
When you sell a rental property in Canada, the positive difference between the proceeds of disposition and the adjusted cost base (ACB) constitutes a capital gain. The proceeds of disposition equal the actual sale price minus disposition costs (real estate commissions, legal fees, mortgage discharge fees). The ACB equals the original acquisition cost plus capital expenditures (permanent improvements such as a new roof, major plumbing renovation, or addition of a unit), minus any CCA claimed over the years.
Inclusion Rates: The 2024 Rules
Since June 25, 2024, the fédéral government has modified capital gains inclusion rates. For individuals, the first $250,000 of net capital gains realized in a year remains included at 50%. The excess beyond $250,000 is included at 66.67%. For corporations and trusts, the inclusion rate is 66.67% from the first dollar of gain. Only the included portion of the gain is added to taxable income and subject to the taxpayer's marginal tax rate.
- Calculate the proceeds of disposition: Sale price of the property minus selling costs (real estate broker's commission, notary fees, mortgage discharge fees, adjustments).
- Déterminé the adjusted cost base (ACB): Original acquisition cost + capitalized improvements (major renovations, additions) - CCA claimed during the holding years.
- Calculate the capital gain: Proceeds of disposition - ACB = capital gain (or capital loss if the result is negative).
- Apply the inclusion rate: Individuals: 50% on the first $250,000, 66.67% on the excess. Corporations: 66.67% on the full amount.
- Add to taxable income: The taxable capital gain is added to your income and taxed at your combined fédéral-Quebec marginal rate.
Dépréciation Recapture
If you claimed CCA during the holding period, the sale of the building may trigger dépréciation recapture. This recapture occurs when the lesser of the original cost and the proceeds of disposition exceeds the UCC of the property. Recapture is taxed at 100% as ordinary income — it is not a capital gain. For example, if you purchased a building for $400,000 (excluding land), claimed $80,000 in CCA (remaining UCC of $320,000), and sell the building for $450,000, the recapture would be $80,000 ($400,000 - $320,000), taxed as ordinary income, and the capital gain would be $50,000 ($450,000 - $400,000).
Capital Gain Deferral Strategies
Section 40(1)(a)(iii) of the Income Tax Act allows the seller to claim a reserve when part of the proceeds of disposition is not received in the year of sale. This is the typical case of a vendor take-back mortgage, where the buyer pays part of the price over time. The seller can then spread recognition of the capital gain over a maximum of five years, reporting each year the proportion of the gain corresponding to the amounts received. This strategy helps reduce the tax impact by keeping annual income below more favourable tax brackets.