Share article
Share article
Summary: When you sell a rental or investment property in Ontario there is no principal residence exemption, so the gain is taxable. Half of the gain (the 50% inclusion rate) is added to your income and taxed at your marginal rate, and any capital cost allowance you claimed can be recaptured.
Your own home is usually shielded from capital gains tax by the principal residence exemption. A rental or investment property is not, which is why selling one has tax consequences a sale of your own home would not.
How is capital gains tax calculated on a rental property?
Your capital gain is the sale price minus your adjusted cost base (ACB) and your selling costs. Only half of that gain is taxable at the 50% inclusion rate, and the taxable half is added to your income for the year and taxed at your marginal rate.
The calculation runs in four steps:
Start with the proceeds. The price the property sold for.
Subtract the adjusted cost base. What you paid plus certain costs and improvements (see below).
Subtract selling costs. Real estate commission, legal fees, and similar.
Include half at your marginal rate. 50% of the resulting gain is added to your income and taxed.
A home you lived in is treated very differently from a property you rented out.
Your home (principal residence) | Rental / investment property | |
Principal residence exemption | Usually available | Not available |
Is the gain taxable? | Usually no | Yes |
Inclusion rate | n/a | 50% of the gain |
CCA recapture | n/a | Possible if CCA was claimed |
What is the capital gains inclusion rate in 2026?
The inclusion rate is 50%. A 2024 proposal would have raised it to two-thirds on individual gains above $250,000, but that increase was cancelled in 2025 and never became law, so half of a capital gain remains taxable. The Canada Revenue Agency administers how gains are reported and taxed.
That taxable half is not a flat tax; it is added to your income and taxed at whatever marginal rate applies to you that year.
How do you calculate your adjusted cost base (ACB)?
Your ACB is more than the purchase price. Getting it right lowers the taxable gain, so keep records from the day you buy. It generally includes:
The purchase price you originally paid for the property.
Acquisition costs, such as land transfer tax and legal fees on the purchase.
Capital improvements that add lasting value, like a new roof, an addition, or a finished basement.
Not ordinary repairs and maintenance, which are current expenses, not additions to ACB.
What is capital cost allowance recapture?
Capital cost allowance (CCA) is the depreciation you can claim against rental income while you own the property. It lowers your tax during the years you rent, but there is a catch at sale.
If you claimed CCA and then sell for more than the property's depreciated value, the CRA "recaptures" that depreciation and taxes it as ordinary income in the year of sale, on top of any capital gain. This is separate from the capital gain itself, and it is a common surprise for landlords, so factor it in before you sell.
What about change of use and non-resident sellers?
Two situations change the picture:
Change of use. Converting your home into a rental (or a rental back into your home) is treated as a deemed disposition at fair market value, which can trigger a gain even though you did not sell. Elections under the Income Tax Act can sometimes defer this, so get tax advice before you change how a property is used.
Non-resident sellers. If you are not a resident of Canada, the buyer must withhold a portion of the sale price until you provide a clearance certificate from the CRA. Your real estate lawyer manages this withholding and certificate at closing so the funds release correctly.
Ownright does not give tax advice, but on a sale we handle the closing mechanics, including the non-resident clearance process, and we will flag when you should speak to an accountant before you sign.
Frequently asked questions
Do you pay capital gains tax on a rental property in Ontario?
Yes. Unlike your principal residence, a rental or investment property does not qualify for the principal residence exemption, so the gain on sale is taxable, with 50% included in your income.
How much is capital gains tax on a rental property?
There is no single rate. Half of the gain is added to your income and taxed at your marginal rate, so the effective tax depends on your total income for the year.
Can you avoid capital gains tax on a rental property?
You cannot simply avoid it, but an accurate adjusted cost base, capital improvement records, and timing the sale can reduce the taxable gain. Speak with an accountant about your situation.
What happens to the CCA I claimed?
If you claimed capital cost allowance, selling above the depreciated value triggers recapture, which is taxed as ordinary income in the year of sale, separate from the capital gain.
When do you report the gain?
You report a capital gain on your tax return for the year the sale closes, on Schedule 3, along with any recaptured CCA as income.
About the author
Joel Fox is a co-founder and COO at Ownright. He helps run the firm's day-to-day work on Ontario residential closings, refinances, and sales, and writes regularly to demystify the parts of a transaction that most homeowners only encounter once or twice in their lives.
At Ownright, we focus entirely on Ontario residential real estate law, helping clients with purchase closings, refinances, and sales. Our licensed Ontario lawyers handle the closing on your sale, including the non-resident clearance process where it applies, on a fully digital platform. You can start your closing online or get in touch with any questions.
Legal references: Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), ss. 38–40 (capital gains), s. 45 (change of use), s. 116 (non-resident dispositions).
Important note: This article is not legal or tax advice. No one should act, or refrain from acting, based solely on the information in this post or any linked materials without first seeking appropriate legal, tax, or professional advice.
