Selling a rental or a second home? Unlike your principal residence, these come with a capital gains tax bill and a sneaky extra called CCA recapture that catches a lot of owners off guard. Here’s exactly how it’s calculated and how to keep the tax as low as legally possible in 2026.
When you sell a rental or second property in Canada, you owe capital gains tax on the profit. Only 50% of the gain is taxable (added to your income). But if you claimed depreciation (CCA) over the years, you may also face recapture that deducted depreciation gets added back as fully taxable income. You report it all on Schedule 3. Smart timing, tracking every eligible cost, and using capital losses can meaningfully lower the bill.
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When Capital Gains Tax Applies (Rental / Second Property)
Capital gains tax applies when you sell a property that isn’t your principal residence, such as:
- A rental/investment property
- A second home, cottage, or vacation property (for years not designated as principal residence)
- A property used to earn income
- Inherited or gifted property you later sell (with its own cost-base rules)
The principal residence exemption doesn’t cover these, so the gain is taxable.
How to Calculate Your Capital Gain (ACB, Proceeds, Costs)
The basic formula:
Capital gain = Proceeds of disposition − Adjusted Cost Base (ACB) − Outlays and expenses
- Proceeds: what you sold it for.
- Adjusted Cost Base (ACB): what you paid, plus capital improvements (renovations, additions), legal fees on purchase, and land transfer tax but not routine repairs.
- Outlays/expenses: selling costs like real estate commission, legal fees, and advertising.
Example:
| Item | Amount |
| Sale price (proceeds) | $800,000 |
| ACB (purchase + improvements) | − $520,000 |
| Selling costs (commission, legal) | − $30,000 |
| Capital gain | $250,000 |
The Inclusion Rate and How the Tax Is Figured
Canada includes 50% of your capital gain in taxable income (the proposed increase to two-thirds was cancelled, so it remains 50%). That taxable half is added to your income and taxed at your marginal rate.
Continuing the example: $250,000 gain × 50% = $125,000 added to income. At, say, a ~40% marginal rate, that’s about $50,000 of tax. Your actual rate depends on your total income for the year.
CCA (Depreciation) Recapture the Hidden Tax
Here’s the one that surprises people. If you claimed Capital Cost Allowance (CCA) depreciation on the building over the years to reduce your rental income, selling can trigger recapture. The CRA “recaptures” the depreciation you deducted by adding it back as fully taxable income (100%, not 50%) in the year of sale, up to the original cost.
So you get a capital gain and potentially a recapture hit. That’s why many landlords think twice before claiming CCA it defers tax during ownership but can come back at sale. Whether to claim CCA is a planning decision worth discussing with an accountant.
Reporting on Schedule 3
You report the disposition of the property on Schedule 3 (Capital Gains) of your T1 return, with the taxable capital gain flowing to your income. CCA recapture is reported through your rental statement (Form T776) as income. Keep documentation of your ACB, improvements, and selling costs the CRA can ask you to support the numbers.
Ways to Reduce Capital Gains (Timing, Expenses, Exemptions)
Legitimate ways to lower the tax:
- Track every capital improvement renovations raise your ACB and cut the gain.
- Claim all selling costs commission, legal, staging, advertising.
- Time the sale selling in a lower-income year reduces your marginal rate on the taxable half.
- Offset with capital losses sell losing investments in the same year to net against the gain (or carry losses back/forward).
- Consider the principal residence designation for years the property qualified (if it was ever your home).
- Spread with a reserve if paid over multiple years, a capital gains reserve can spread the gain (up to 5 years).
- Think twice about CCA to avoid recapture.
FAQ
How much capital gains tax will I pay on my rental property?
Half of your gain is taxable and added to your income at your marginal rate. On a $250,000 gain, about $125,000 is taxable the tax depends on your bracket.
What is CCA recapture?
If you claimed depreciation (CCA) on the property, selling adds that back as fully taxable income (100%), on top of your capital gain. It’s an easily missed extra tax.
What’s included in my adjusted cost base?
Your purchase price plus capital improvements, legal fees on purchase, and land transfer tax not routine repairs or maintenance.
Is the capital gains inclusion rate still 50%?
Yes, the proposed increase to two-thirds was cancelled, so 50% of your gain is taxable.
Can I use capital losses to reduce the tax?
Yes, capital losses (e.g., from investments) offset capital gains in the same year, and can be carried back three years or forward indefinitely.
Do I pay tax on a second home or cottage?
Yes, unless you designate it as your principal residence for those years (only one property per family per year can be designated).
Where do I report the sale?
On Schedule 3 of your T1 return; CCA recapture is reported via your rental form (T776).
Should I claim CCA on my rental?
It lowers rental income now but can cause recapture at sale. Whether it’s worth it depends on your situation a common planning question for an accountant.