Capital Gains on Sale of Rental Property | Quebec Guide

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When selling a rental property in Canada, the owner must deal with two types of taxation: capital gains and recapture of capital cost allowance (CCA). The capital gain is the difference between the proceeds of disposition (sale price minus selling costs) and the adjusted cost base (ACB) of the property. For individuals, the capital gains inclusion rate is 50% on the first $250,000 of gains realized in the year, and 66.67% for the excess, under rules effective June 25, 2024. For corporations and trusts, the inclusion rate is 66.67% from the first dollar. Only the included portion of the gain is added to taxable income and taxed at the taxpayer's marginal rate. Dépréciation recapture occurs when the proceeds of disposition exceed the undepreciated capital cost (UCC). This recapture is taxed as ordinary income at 100%. Capital gain deferral is possible in certain situations, notably through a reserve for proceeds of disposition receivable (section 40(1)(a)(iii) of the Income Tax Act) when the seller finances part of the sale price. In Quebec, the gain is also taxable provincially under the same inclusion rules. Mortgage brokers should understand these mechanisms to help investor clients plan property sales and evaluate the tax impact on future borrowing capacity.

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.

Frequently Asked Questions

How do I calculate the capital gain on a rental property sale?

The capital gain is calculated as: proceeds of disposition (sale price minus selling costs such as commissions and legal fees) minus the adjusted cost base (ACB), which equals the original acquisition cost plus capitalized improvements, minus any CCA claimed. If the result is positive, it is a capital gain.

What is the capital gains inclusion rate in 2025?

For individuals, the inclusion rate is 50% on the first $250,000 of net capital gains realized in the year, and 66.67% for the excess. For corporations and trusts, the rate is 66.67% from the first dollar. These rules have been in effect since June 25, 2024.

What is dépréciation recapture?

Dépréciation recapture occurs when you sell a building for more than its undepreciated capital cost (UCC). The difference between the proceeds of disposition (capped at the original cost) and the UCC is taxed as ordinary income at 100%, not at the reduced capital gains rate.

Can I defer paying capital gains tax?

Yes, if the seller finances part of the sale price (vendor take-back mortgage), they can claim a reserve under section 40(1)(a)(iii) of the Income Tax Act. This reserve allows the gain to be spread over a maximum of five years, in proportion to the amounts received each year.

Is my principal residence exempt from capital gains?

Yes, the sale of your principal residence is generally exempt from capital gains under the principal residence exemption in section 40(2)(b) of the Income Tax Act. However, a rental property that is not your principal residence does not qualify for this exemption.

Is capital gains tax the same at the fédéral and provincial levels?

The inclusion rules are the same: 50%/66.67% for individuals and 66.67% for corporations. However, marginal tax rates differ between the fédéral and Quebec levels, meaning the total tax paid depends on your combined tax bracket.