Selling a Rental Property in Canada: Gain, Recapture and Loss

How much of the gain on a rental property is taxed?

For a Canadian resident who held a rental as capital property, 50% of the capital gain is included in taxable income. That is the inclusion rate, not the tax rate you pay; the actual tax depends on your other income and province or territory. The proposed higher inclusion rate was cancelled, and the Income Tax Act still sets the rate at one half (CRA confirmation).

The building can produce both a capital gain and CCA recapture. They measure different amounts: appreciation above the building's capital cost and reversal of CCA previously deducted. The CRA's capital gains guide explains both calculations. A sale after a short holding period may instead fall under the property flipping rules.

How do I calculate the capital gain?

Subtract the property's adjusted cost base and the costs of selling it from the sale proceeds. Calculate land and building separately so you can also work out the building's CCA result (CRA: calculating capital gains).

Do not subtract the mortgage balance from the gain. Paying off a loan changes the cash you receive at closing, not the property's adjusted cost base. Keep purchase and sale statements or transfer valuation records, improvement invoices, and commission and legal bills. The CRA's rental guide explains purchase costs and selling costs. Repairs made in anticipation of a sale or as a condition of sale are generally capital expenses; ordinary repairs that would have happened anyway may remain current expenses (CRA: current or capital expenses).

What is CCA recapture, and how is it taxed?

Undepreciated capital cost (UCC) is the tax balance left in the building's CCA class after past deductions and other adjustments. Recapture can arise when the net proceeds allocated to the building exceed that balance. The recapture is added in full to rental income in the year of sale, even if the buyer pays later (CRA: T4037).

For the building's CCA class, subtract from UCC the lesser of its net proceeds and its capital cost. A negative class balance is recapture; a positive balance may be a terminal loss if nothing remains in the class. The building's gain above capital cost is calculated separately. A rental building acquired after 1971 generally has its own CCA class if its building cost, excluding land, is at least $50,000. Exceptions apply, so check the prior CCA schedule before treating the sale as closing the class (CRA: T4036; Income Tax Regulations, section 1101). For CCA classes and past claims, see Capital cost allowance.

How do I split the sale price between land and building?

Allocate the purchase price, sale price and related costs on a supportable basis. Land cannot be depreciated; the building allocation determines CCA recapture or terminal loss as well as each part's capital gain. Where the contracts do not split the price, the CRA illustrates using municipal assessments. If the assessments reasonably reflect value, multiply the purchase price by land's share of the purchase-date assessment to find land cost; the remainder is building cost. Use the sale-date shares to split sale proceeds and selling costs. An appraisal may be needed if renovations make an assessment unreliable.

Do not choose an allocation solely to reduce recapture. If the building's proceeds are below both its cost amount and capital cost, Income Tax Act subsection 13(21.1) can deem a different building and land allocation, especially where the land has appreciated. Keep the contract, municipal assessments and any appraisal with your CCA records.

What if I sell the rental at a loss?

A loss on land may be a capital loss; a loss on a depreciable building is not. Instead, the building may give a terminal loss if its CCA class has a positive UCC balance and no property remains in that class (CRA: selling a rental property; CRA: T4036).

A land capital loss generally offsets capital gains, not wages or rental income. Unused net capital losses can generally be carried back to the three preceding tax years or forward to future years (CRA: reporting gains and losses). A terminal loss generally reduces rental income and may create a rental loss. If you also have a gain on land, apply the special building proceeds rule before claiming a terminal loss (CRA: T4036). A sale to an affiliate may delay the loss if you or an affiliate still owns or can reacquire the building 30 days later (Income Tax Act, subsection 13(21.2)).

Can I spread the gain over several years if the buyer pays over time?

You may claim a capital gains reserve for sale proceeds payable after the end of the year. The reserve can spread an ordinary rental property's capital gain over up to five tax years, but it does not spread CCA recapture (CRA: capital gains reserve; Income Tax Act, section 40).

The reserve is limited by both the unpaid proceeds and the annual statutory maximum. You may have to report some gain before the buyer makes the final payment; the reserve cannot defer the whole gain until then. You calculate the full gain first, claim the reserve on Form T2017, add the prior year's reserve back the next year, and calculate any new reserve. You generally cannot claim it if you cease to be a Canadian resident at the required time or sell to a corporation you control (CRA: capital gains reserve). Keep the sale agreement and payment schedule.

Can I defer tax by buying another rental?

Buying another rental after voluntarily selling an ordinary rental does not by itself defer the gain or recapture. Property used principally to earn rent is generally excluded from the "former business property" rule. A building leased to a related person for use principally in a non-rental business may qualify if the replacement and election conditions are met (CRA: Replacement Property folio; Income Tax Act, section 248).

An involuntary disposition, such as destruction or expropriation, can qualify. For an individual, the replacement generally must be acquired by the end of the second tax year after proceeds become receivable; for a qualifying voluntary sale, by the end of the first following tax year. The owner elects on the return for the replacement year, attaching a letter if the replacement occurs in another year. A valid election can defer both a gain and CCA recapture (CRA: Replacement Property folio).

Can a large gain trigger alternative minimum tax?

Yes. A large taxable capital gain can require a separate alternative minimum tax calculation; the result depends on your full return, not just the rental sale. The CRA lists taxable capital gains among the situations to check and uses Form T691. A reserve, other gains, losses, deductions and credits can change the result.

Quebec residents may also need a provincial minimum tax calculation on Form TP-776.42-V. Check both calculations before agreeing to delayed payments or budgeting the sale proceeds.

How do I report the sale on my return?

Report the capital disposition on Schedule 3, even if it produces a loss. Report CCA recapture or a terminal loss on Form T776, using the building's CCA schedule; each co-owner reports their own share (CRA: completing Schedule 3; CRA: T4036).

The CRA requires a return for a capital disposition even without a taxable gain. Quebec's Schedule G and TP-128-V cover its separate return. Reconcile each co-owner's share to the sale statement and prior CCA schedules before filing.

Example

Illustrative Canadian-dollar amounts. An individual bought a rental for C$400,000, allocated C$100,000 to land and C$300,000 to the building. Later, C$40,000 of capital improvements increased the building's cost to C$340,000. The individual claimed C$50,000 of CCA, leaving C$290,000 of UCC. Assume no other purchase costs or assets in the building's class.

The property sells for C$600,000: C$180,000 for land and C$420,000 for the building. C$20,000 of selling costs is allocated C$6,000 to land and C$14,000 to the building.

The total capital gain is C$140,000, of which C$70,000 is included in income. For CCA, subtract the lesser of C$406,000 net building proceeds and C$340,000 building capital cost from C$290,000 UCC. The C$50,000 negative balance is recapture, included in full as rental income. Thus C$120,000 enters the individual's income before other deductions or losses. That is income included, not the tax bill.

Different for you?

• The property was once your home, or you moved into it: a deemed sale or election may change the cost base; see Turning a home into a rental and the principal residence exemption.
• You held the property for less than 365 consecutive days: the property flipping rules may replace capital gain treatment.
• You are a non-resident, or the property is outside Canada: see Non-residents selling Canadian property, Property outside Canada or Canadians selling US real estate.
• The property is new or substantially renovated: check GST/HST on residential property before closing.
• A corporation owns the rental: see Holding and investment corporations.
• A partnership owns the rental: the partnership allocates the gain to partners; review its statement with tax preparation.
• You missed an earlier sale: see Unreported income and voluntary disclosure.
• The sale has a large gain, a possible terminal loss, seller financing or personal-use years: gather both closing statements, prior CCA schedules, improvement invoices, assessments, and legal and commission bills for tax preparation.