Capital Gains Tax on a Rental Property in Canada (2026): The Numbers That Actually Matter

In brief — 50% of the capital gain is taxable and added to your income for the year, at your marginal rate. The 50% inclusion rate remains in effect in 2026.

Sell a rental property for more than you paid and you owe capital gains tax. But the gap between your headline "profit" and your taxable amount is where most investors miscalculate — usually to their own cost. Here is the exact formula, what you can add to reduce the tax, and how recapture can double the surprise.

This is a federal framework that applies across Canada. Only your marginal tax rate — which sets how much tax you actually pay on the taxable portion — varies by province.

The formula

Capital gain = (Sale price − Selling costs) − Adjusted Cost Base (ACB)

Then:

Taxable amount = Capital gain × 50%

The 50% inclusion rate still applies in 2026. The proposed increase to 66.67% from the 2024 federal budget was cancelled on March 21, 2025; there is no $250,000 threshold. Half of your gain is added to your income for the year and taxed at your marginal rate.

Adjusted cost base (ACB): your best lever

Your ACB is the full tax cost of the property — and the higher it is, the smaller your taxable gain. Too many investors reduce it to the purchase price alone. In reality it includes:

• the purchase price
• land transfer tax paid at purchase (Ontario LTT + Toronto MLTT, BC PTT, etc. — see your province's guide)
• legal fees on acquisition
• capital improvements (new roof, windows, a full unit renovation)

Every dollar added to ACB is a dollar not taxed on sale. Keep receipts for the entire holding period — it can be worth thousands.

Current vs capital expenses: the distinction that costs money

• A current expense (repairs, maintenance, like-for-like replacement) is deductible against rental income in the year.
• A capital expense (an improvement that extends the property's life or increases its value) is not deducted from rental income; it is added to the property's cost base and your ACB.

Fixing a step is current; rebuilding the whole staircase in better materials is capital. Classifying these correctly over the years ensures your improvements raise your ACB at sale.

Watch out: capital gains is not the only tax

If you claimed Capital Cost Allowance (CCA) — depreciation — during ownership, the sale triggers two separate taxes:

1. CCA recapture, taxed at 100%, on the depreciation you claimed.
2. Capital gain, taxed at 50%, on the appreciation above your original cost.

Projecting only the capital gain and forgetting recapture is a common and expensive mistake. See our guide to CCA recapture on a rental property.

The 365-day anti-flipping rule

If you hold a residential property for less than 12 months before selling, the anti-flipping rule (in force since January 1, 2023) recharacterizes the profit as 100%-taxable business income — not a 50% capital gain, and with no principal residence exemption. Short holds are heavily penalized; factor this in before buying if you plan a quick resale.

In British Columbia, an additional tax (the BC Home Flipping Tax) applies on resales under 730 days. Both regimes are detailed in our property flipping tax guide.

Owner-occupied? Partial principal residence exemption

If you live in one unit of a small multiplex, the portion you occupy as your principal residence may qualify for a partial principal residence exemption, while the rented portion remains subject to capital gains. The split is usually pro-rated by area. It is a real advantage of house-hacking, but it requires careful documentation.

Model your exit tax before you buy

A property's true return is not the gross gain — it is the net after-tax gain, once recapture, the 50% inclusion, and selling costs are removed, at your marginal rate in the year of sale. DeedWorth projects exactly this: ACB, CCA recapture, and capital gain, net, over a 10-year horizon, so you compare exit scenarios after tax rather than on the sticker price. Analyze a property with DeedWorth →

FAQ

What percentage of a capital gain is taxable in Canada? 50% of the capital gain is taxable and added to your income for the year, at your marginal rate. The 50% inclusion rate remains in effect in 2026.

What is the adjusted cost base of a rental property? It is the property's total tax cost: purchase price, land transfer tax, legal fees on acquisition, and capital improvements. A higher ACB means a smaller taxable gain.

Does capital gains tax vary by province? The 50% inclusion rate is federal and the same everywhere. What varies is your marginal tax rate, which determines the actual tax on the taxable half of the gain.

Are capital gains and CCA recapture the same thing? No. Recapture applies to the depreciation (CCA) you claimed and is taxed at 100%. The capital gain applies to appreciation above your original cost and is taxed at 50%. Both can apply to the same sale.

What happens if I sell within a year of buying? The 365-day anti-flipping rule treats the profit as 100%-taxable business income, with no capital gains treatment and no principal residence exemption.

Related guides

• CCA recapture on a rental property
• Deductible rental expenses in Canada
• Rental income and tax: T776 / TP-128
• Ontario land transfer tax
• Down payment rules for a duplex or triplex in Canada

This article is for information only and is not tax advice. Rules change; confirm your situation with an accountant or tax specialist. Last verified: June 2026.