The capital gains landscape in Canada has changed twice in 18 months. Here’s where things stand: the proposed hike in the capital gains inclusion rate (50% → 66.67%) was cancelled by Prime Minister Mark Carney on March 21, 2025. As a result, all capital gains on rental property in Canada are still taxed at the 50% inclusion rate as of 2026. If you sold a rental in 2024 or 2025, thinking you’d owe more, you don’t.
That said, capital gains tax on a rental sale is rarely just a “50%” calculation. CCA recapture, the principal residence exemption, change-of-use elections, and the timing of your sale can each move your final bill by tens of thousands of dollars. This guide walks through every legal lever a Canadian landlord can pull in 2026 to reduce — or in some cases avoid — capital gains tax on a rental property.
Key Points
1. Capital gains on Canadian rental property are still taxed at the 50% inclusion rate in 2026 — the proposed hike to 66.67% was cancelled by PM Mark Carney on March 21, 2025.
2. The biggest hidden cost at sale is CCA recapture: any depreciation claimed during ownership gets added back to income and taxed at your full marginal rate, not the capital gains rate.
3. Landlords can legally reduce the bill by (1) timing the sale for a low-income year, (2) offsetting the gain with RRSP contributions or capital losses, (3) claiming a capital gain reserve to spread tax over up to 5 years, or (4) filing Section 45(2) or 45(3) change-of-use elections.
What Are Capital Gains On Rental Property?
Capital gains on rental property are the profits realized when you sell the rental for more than you paid for it. This is distinct from cash flow (the monthly rental income net of expenses) and applies to any investment property — whether that’s a single-family rental, a condo, a duplex where one unit is rented, or a multi-unit building.
Learn more: How To Avoid The Capital Gains Tax In Canada
How Capital Gains On Rental Property Are Taxed In Canada
The CRA includes 50% of any capital gain in your taxable income for the year of sale. That taxable amount is added to your other income and taxed at your marginal rate. As of 2026, the 50% inclusion rate applies to all capital gains, regardless of amount — the 66.67% increase proposed in Budget 2024 was cancelled by PM Carney on March 21, 2025.
How Capital Gains On Rental Property Are Calculated
Your ACB is the original purchase price plus legal fees, land transfer tax, and the cost of any capital improvements (a new roof, a basement renovation). It does not include routine repairs or maintenance — those are deducted as rental expenses each year. Outlays are selling costs: real-estate commission, legal fees on the sale, and any required staging or inspection fees.
The Formula
Capital Gain = Proceeds of Disposition − Adjusted Cost Base (ACB) − Outlays and Expenses
Proceeds of disposition: the sale price of the property.
Adjusted cost base (ACB): the original purchase price plus closing costs (legal fees, land transfer tax) and any capital improvements (e.g., new roof, renovations).
Outlays and expenses: selling costs such as real-estate commission, legal fees, staging, or inspections.
Worked example: You bought a rental condo in 2014 for $400,000 and paid $8,000 in closing costs. You spent $25,000 on a kitchen renovation in 2019. You sell it in 2026 for $720,000 with $25,000 in commission and legal fees.
- Proceeds: $720,000
- ACB: $400,000 + $8,000 + $25,000 = $433,000
- Outlays: $25,000
- Capital gain: $262,000
- Taxable amount (50% inclusion): $131,000 — added to your income for the year of sale.
At-A-Glance: 7 Strategies To Reduce Capital Gains Tax On Canadian Rental Property
| Strategy | Best for | The Catch |
|---|---|---|
| 1. Time the sale | Owners with a flexible closing window or an upcoming low-income year | Tax bill is delayed, not erased; market timing risk |
| 2. RRSP contribution | Anyone with available deduction room and earned income | Caps at $33,810 (2026); reduces, doesn’t eliminate, the gain |
| 3. TFSA contribution | Long-horizon investors with $7,000+ unused room | Doesn’t reduce taxable income — only shelters future growth |
| 4. Apply capital losses | Investors with losing stocks or other capital losses on hand | Need actual losses to harvest; can’t manufacture them |
| 5. Capital gain reserve | Sellers who finance the buyer (vendor take-back mortgage) | Spreads tax over up to 5 years; you must collect the proceeds in stages |
| 6. Transfer to spouse as principal residence | Couples where one spouse will occupy the property | Spouse must genuinely live there; attribution rules apply |
| 7. Hold property in a corporation | Investors building a multi-property portfolio | LCGE does NOT apply; setup + annual filing costs; no principal residence exemption |
1. Sell Your Rental Property At The Right Time For You
Timing the sale of a rental property is one of the most-overlooked capital gains strategies. Two angles to consider:
Push the tax into next year. A sale that closes on January 2 instead of December 30 effectively defers your tax bill from this April 30 to next April 30 — a full year of float on the cash. There’s no tax savings, but there’s a meaningful cash-flow benefit if you can earn interest or pay down debt with the proceeds in the meantime.
Sell in a low-income year. Because the taxable portion of a capital gain stacks on top of your other income, selling during a year when your other income is unusually low (sabbatical, retirement, parental leave, business loss) keeps more of the gain in lower marginal brackets. For high earners considering retirement within a few years, deferring the sale until that lower-income year can save five figures.
2. Contribute To Your RRSP
An RRSP contribution lowers your taxable income for the year — directly offsetting some or all of the taxable portion of your capital gain.
Example: A $100,000 capital gain produces $50,000 of taxable income at the 50% inclusion rate. A $50,000 RRSP contribution (if you have the room) wipes that out for tax purposes — though you’ll still owe tax on the RRSP money when you withdraw it in retirement.
2026 limits:
- RRSP dollar limit: $33,810 (or 18% of prior-year earned income, whichever is less)
- 2025 tax-year contribution deadline: March 2, 2026
- Unused contribution room carries forward indefinitely
This works best if you’ve been carrying years of unused room.
3. Contribute To Your TFSA
A TFSA doesn’t reduce the taxable portion of your gain — contributions aren’t deductible. What it does is shelter the next round of gains. Once the proceeds are inside a TFSA, all future investment growth and withdrawals are tax-free.
2026 limits:
- Annual TFSA dollar limit: $7,000 (third year unchanged)
- Cumulative room for someone aged 18+ since 2009: $102,000
- Unused room carries forward; withdrawals restore room the following year
4. Use Your Capital Losses
Capital losses offset capital gains dollar-for-dollar. The CRA lets you:
- Apply losses against gains in the current year
- Carry losses back 3 years and amend prior returns
- Carry losses forward indefinitely to future gains
Example: A $50,000 taxable capital gain with $15,000 of capital losses on hand becomes a $35,000 taxable amount. If you have unrealized losses in your non-registered investment account, the year of a rental sale is often the right year to crystallize them.
5. Claim A Capital Gain Reserve
If the buyer is paying you over multiple years (a vendor take-back mortgage, for example), you can use the capital gain reserve to spread the gain — and the tax — over up to 5 years instead of recognizing it all at once. Each year you must include at least 20% of the original gain in income.
Catch: the buyer has to actually be paying you in instalments. You can’t claim the reserve on a regular cash-at-closing sale. And if the buyer defaults, the unrecognized portion still becomes taxable.
6. Transfer Ownership To Your Spouse
If your spouse or common-law partner moves into the property as their principal residence, the principal residence exemption can shelter the gain from that point forward. This is most useful for couples who own multiple properties and are willing to designate one of them differently.
Catches:
- Your spouse must genuinely occupy the property as a principal residence.
- Attribution rules can claw the income back to you if the structure looks like income-splitting rather than a real change of residence.
- Only one property per family unit per year can be designated as the principal residence.
This strategy needs a tax accountant; missteps trigger CRA reassessment.
7. Hold The Property In A Corporation
Holding rental real estate in a corporation lets you:
- Pay corporate tax rates on net rental income (often lower than personal rates)
- Split dividend income among adult shareholders
- Defer personal tax until you actually withdraw money from the company
Important caveat: Holding rental property in a corporation does NOT qualify for the Lifetime Capital Gains Exemption (LCGE), which rose to $1.25M in 2024 and is approximately $1.275M for 2026 (indexed). The LCGE applies only to qualified small business corporation shares, qualified farm property, and qualified fishing property — passive rental real estate is excluded. Incorporation is a tax-deferral and income-splitting strategy for rental, not an exemption strategy.
There are also higher administrative costs (annual corporate filings, separate accounting), and you lose access to the principal residence exemption.
The CCA Recapture Trap (Read This Before Claiming Depreciation)
Capital Cost Allowance (CCA) is the depreciation deduction landlords can claim against rental income each year. It lowers your annual tax bill — but it isn’t free. When you sell, the CRA “recaptures” the difference between the building’s sale-allocated proceeds and its undepreciated capital cost (UCC, the original building cost minus all CCA you’ve claimed over the years). The full recaptured amount comes back into your income, taxed at your marginal rate, not the 50% capital gains rate.
Why this matters: A landlord who claimed $40,000 in CCA over 10 years and is in a 43% marginal bracket will owe roughly $17,200 in recapture tax on top of any capital gain. Many investors find their CCA savings during ownership get fully clawed back at sale.
Because CCA is optional under CRA Guide T4036, the standard advice is: only claim CCA if you’re certain you’ll never sell, or if your marginal rate at sale will be much lower than today’s. Run the numbers with a tax accountant before claiming CCA in any year.
Change-Of-Use Elections (Section 45(2) and Section 45(3))
If you’ve moved out of your home and turned it into a rental, the CRA treats it as a deemed disposition at fair market value — triggering capital gains tax even though you haven’t sold anything. A Section 45(2) election lets you defer that disposition and keep claiming the principal residence exemption for up to 4 additional years.
If you’re going the other way — moving into a property you previously rented — a Section 45(3) election defers the deemed disposition until you actually sell, and lets you designate up to 4 prior rental years as principal-residence years. Catch: you can’t make a 45(3) election if you ever claimed CCA on the property.
Both elections are filed as a signed letter with the relevant year’s tax return. Miss the filing window and the deemed disposition stands.
2026 Update: Underused Housing Tax (UHT) Eliminated
Bill C-15 (passed March 26, 2026) ended the Underused Housing Tax (UHT). Owners no longer need to file the UHT-2900 return for 2025 or any future year. UHT obligations for 2022-2024 calendar years still stand, including penalties for late filings, so don’t ignore prior-year notices.
Tax Deductions Available To Canadian Landlords
While you own the rental, the following expenses are deductible against rental income each year (claim them on Form T776):
- Advertising for tenants
- Home insurance on the rental
- Mortgage interest (not principal)
- Property taxes
- Property management fees
- Utilities you pay
- Repairs and maintenance (not capital improvements — those go into ACB)
- Office expenses
- Legal and accounting fees
- Salaries paid to property staff
- Travel to and from the property for legitimate management purposes
Capital improvements (renovations, additions, structural upgrades) are not deducted in the year incurred — they’re added to the property’s adjusted cost base, reducing the eventual capital gain at sale.
Learn more: Tax Deductions For Rental Property In Canada
A Note On Tax Avoidance vs. Tax Evasion
Every strategy in this guide is tax avoidance — using the rules as written to minimize what you owe. That’s legal and expected. Tax evasion — hiding income, falsifying ACB, claiming the principal residence exemption on a property that was never your principal residence — is a criminal offence. Before implementing any strategy here, consult a CPA or tax lawyer to make sure the structure holds up under CRA scrutiny.
Learn more: What Is The Difference Between Tax Avoidance vs. Tax Evasion?
Bottom Line
The 50% inclusion rate is here to stay for 2026, but the effective tax you pay on a rental sale depends heavily on structure: timing, contribution-room use, loss harvesting, change-of-use elections, and whether you ever claimed CCA. The single biggest mistake Canadian landlords make is treating capital gains as a one-line calculation. Run the full numbers — capital gain plus CCA recapture plus any provincial surtaxes — with a tax professional before you list. The right strategy can save tens of thousands on a single sale.
Capital Gains Tax FAQs
What are capital gains?
How are capital gains taxed on real estate in Canada in 2026?
Do I have to pay capital gains tax on the sale of my primary residence?
Do capital gains taxes apply to second homes in Canada?
How long do you need to live in a home to avoid paying capital gains taxes?
What is CCA recapture and does it apply to rental property?
Can I avoid capital gains tax by moving into my rental before selling?
Sources
- Prime Minister Mark Carney cancels proposed capital gains tax increase (PMO, March 21, 2025): https://www.pm.gc.ca/en/news/news-releases/2025/03/21/prime-minister-mark-carney-cancels-proposed-capital-gains-tax-increase
- Income Tax Folio S1-F3-C2, Principal Residence (CRA): https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-1-individuals/folio-3-family-unit-issues/income-tax-folio-s1-f3-c2-principal-residence.html
- Rental Income Guide T4036 (CRA): https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4036/rental-income.html
This article is for general information only and does not constitute tax advice. Consult a Canadian CPA or tax lawyer before acting on any strategy described above.
