The Tax Bill When You Sell an Ontario Rental Property: Capital Gains and CCA Recapture Explained
An investment property is not your home. Half the gain is taxed, and every dollar of depreciation you claimed comes back as fully taxable income on the sale.
What tax do you pay when you sell a rental or investment property in Ontario?
When you sell a non-principal-residence rental or investment property, two taxes typically apply. First, a capital gain — calculated as proceeds minus adjusted cost base (ACB) minus selling costs — of which 50% (the current inclusion rate) is added to your taxable income for the year. Second, CCA recapture — if you claimed depreciation (Capital Cost Allowance) on the building in prior years, that depreciation is recaptured and taxed as ordinary income at 100%, with no halving. A principal residence can shelter its gain under the Principal Residence Exemption; a rental cannot.
Source: CRA, Capital Gains 2025 (T4037) and T776 Line 9947 Recaptured CCA (2025)
Many GTA landlords focus on how much the property went up in value and get blindsided at tax time by two separate bills: capital gains tax, and — often the bigger surprise — CCA recapture. In my years as a broker I have watched owners claim depreciation year after year to shrink their rental income, only to discover in the year of sale that all of it comes back at once, taxed as ordinary income. This article breaks the rental-sale tax chain into plain parts: how the gain is calculated, what the inclusion rate actually is right now, where the recapture trap sits, and how all of this differs from selling your home. One thing up front: this is general education, not tax advice — always run your real numbers past a licensed CPA before acting.
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Step 1: Calculate what you actually owe (follow this order)
2. Subtract adjusted cost base (ACB): original purchase price + acquisition costs (legal fees, land transfer tax) + capital improvements.
3. Subtract outlays and expenses: real estate commission, seller legal fees, advertising, and similar selling costs.
4. Result is your capital gain: proceeds − ACB − selling costs.
5. Apply the 50% inclusion rate: half the gain is added to income.
6. Add CCA recapture if you claimed depreciation. According to CRA (2025), the formula is: capital gain = proceeds − ACB − outlays and expenses.
What is the inclusion rate right now? 50% — get this number right
This is where outdated articles mislead people. On June 25, 2024, the federal government proposed raising the inclusion rate from 50% to 66.67% on the portion of an individual’s annual capital gains above $250,000. That proposal had a rocky life: on January 31, 2025 the Department of Finance announced it would defer the effective date to January 1, 2026, and then on March 21, 2025 the government announced it was cancelling the increase entirely. The result: for the 2025 and 2026 tax years the inclusion rate remains 50%, and 66.67% never became law. Anything you read still quoting a two-thirds rate is describing a dead proposal.
⚠️The most common surprise: owners assume they only pay tax on half the gain and forget that CCA claimed in prior years is recaptured 100% as ordinary income in the year of sale. Before you list, find out exactly how much depreciation you have claimed.
💡 During ownership, many landlords claim CCA on the building (not the land) to reduce taxable rental income each year. The upside is lower tax now; the cost is that in the year of sale — if the sale price exceeds the undepreciated capital cost (UCC) — the depreciation you deducted over the years is recaptured and taxed as ordinary income at 100%, at your full marginal rate, with none of the 50% capital-gains break. In other words, claiming CCA defers tax rather than eliminating it, and the bill comes due on sale. This is precisely why CRA’s T4036 Rental Income guide makes CCA optional — you are not required to claim it.
A worked example (illustrative — not your numbers)
Say the building portion cost $400,000, you claimed $60,000 of CCA over the years (UCC now $340,000), and you sell the building portion for $450,000:
• CCA recapture = $60,000 (fully taxable as ordinary income)
• Capital gain = $450,000 − $400,000 = $50,000 (50%, or $25,000, added to income)
That is roughly $85,000 of new taxable income for the year. Had you never claimed the $60,000 of CCA, there would be no recapture — but your rental tax each year of ownership would have been higher. Which path wins depends on your marginal-rate trajectory, which is exactly what a CPA should model.
The core contrast with your home: exemption vs. full taxation
A qualifying home can use the Principal Residence Exemption, sheltering all or most of the gain from tax. A rental or investment property gets no such exemption — the gain is 50% included and the depreciation is 100% recaptured. That is why two properties that each rose $200,000 can produce wildly different bills: the home may be tax-free while the rental owes a substantial amount. Where a property was your home in some years and a rental in others, the exemption is prorated by the years of personal use, and the math gets more involved.
ℹ️Inclusion rates, exemption proration, and 45(2) eligibility all depend on your specific facts and the rules in effect that year. Confirm with CRA’s official guidance and your licensed CPA before acting — this article is general education only.
Change of use and the S.45(2) election
When a property switches from personal use to rental (or the reverse), the tax law treats it as a deemed disposition and reacquisition at fair market value, which can trigger a gain on the spot. The subsection 45(2) election lets you defer that deemed disposition when you move out and rent, and can extend principal-residence treatment for up to four extra years. But there is a hard catch: according to CRA, you cannot make the 45(2) election if CCA has been claimed on the property, and while the election is in effect you must report net rental income and claim no depreciation. The election is made by a signed letter filed with your return for the year the use changed.
💡 1. Timing of the sale: the gain is added to income in the year you close, so closing in a lower-income year can reduce your marginal tax hit.
2. Keep every receipt: acquisition costs and capital improvements raise your ACB and lower the gain — lost documentation means overpaying tax.
3. Whether to claim CCA at all: owners planning to sell soon, or expecting higher future rates, often skip CCA to avoid recapture; long-term holders in high current brackets may value the yearly cash-flow benefit more. There is no universal answer — it turns on your holding period and rate path.
How to act on this
Before you sell a rental, assemble three things: your purchase agreement and acquisition-cost receipts, your prior returns showing CCA and UCC, and a list of this sale’s selling costs. Take these to a licensed CPA or tax accountant and have them model the combined gain-plus-recapture bill on your real figures, and confirm the inclusion rate and current rules for your year. On the real estate side I can help you optimize price, timing, and deal structure; on the tax side, let the professional make the call.
Frequently Asked Questions
What is Canada’s capital gains inclusion rate for 2025 and 2026?
It is 50%. A 2024 proposal to raise it to 66.67% on individual gains above $250,000 was first deferred on January 31, 2025, then cancelled by the government on March 21, 2025, and never became law. According to CRA (2025), the inclusion rate stays at 50% for both 2025 and 2026.
What is CCA recapture and why is it taxed at 100%?
During ownership, depreciation (CCA) you claim on the building lowers your taxable rental income. When you sell, if the price exceeds the undepreciated capital cost (UCC), that depreciation is recaptured — added to income as ordinary income at 100%, taxed at your full marginal rate, with none of the 50% capital-gains break. It is reported on T776 Line 9947.
Can a rental property use the same tax-free exemption as a home?
No. The Principal Residence Exemption applies only to a qualifying home. A pure rental or investment property has its gain 50% included and its depreciation 100% recaptured, with no exemption. If a property was your home in some years and a rental in others, the exemption is prorated by the years of personal use.
If I never claimed CCA, is there any recapture when I sell?
No. Recapture only applies to CCA you actually deducted. If you never claimed depreciation, there is nothing to recapture, and you face only the capital gain (50% included). This is why many owners planning a near-term sale skip CCA — but it means higher rental tax each year of ownership, a trade-off to weigh.
Can I use the S.45(2) election?
It depends. The 45(2) election is mainly used to defer the deemed disposition when a home becomes a rental, and can extend principal-residence treatment up to four extra years. But according to CRA, you cannot make it if CCA has been claimed on the property, and no depreciation may be claimed while it is in effect. A CPA should confirm eligibility based on your filing history.
Arthur Zhao
Real Estate Broker · FRI · ABR · SRS · PSA · MCNE · E-PRO · GUILD Elite
VP & Branch Manager, Bay Street Group Inc.
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