Selling your home? No worries—if it’s your principal residence, you likely won’t owe any taxes. But if you’re selling a rental property, buckle up, because the tax man wants his share.
The good news? In Canada, only 50% of your capital gains are taxable. The not-so-great news? You might also owe recapture tax on past deductions. Don’t worry, though—I’ll break it down for you in plain English (and with real numbers).
Two Types of Taxes You’ll Pay on a Rental Property Sale
When you sell a rental property, there are two main tax categories to account for:
1. Capital Gains Tax – This is the profit from selling your property for more than you bought it.
2. Recapture Tax – This is the tax you’ll owe on depreciation (capital cost allowance) you previously claimed.
Let’s go step by step.
1. Capital Gains Tax on a Rental Property
How Do You Calculate Capital Gains?
Let’s say you bought a rental property for $300,000 and sold it later for $950,000.
Capital Gain Formula:
Selling Price – Purchase Price = Capital Gain
$950,000 – $300,000 = $650,000
Now, because Canada only taxes 50% of capital gains, the taxable amount is:
$650,000 × 50% = $325,000
This taxable gain is added to your income for that year and taxed at your marginal rate. To keep it simple, let’s estimate using a 50% tax rate (though it could be lower if you earn less than $220,000).
Capital Gains Tax Estimate:
$325,000 × 50% = $162,500
So, you’d owe around $162,500 in capital gains tax.
What If You Own the Property in a Corporation?
If your rental is owned by a corporation, the numbers stay similar. The key difference? The taxable portion of the gain is classified as passive income, which is taxed at about 50%.
Capital Gains Tax for a Corporation:
$650,000 × 50% × 50% = $162,500
However, this tax can be reduced to about 20% by declaring dividends to shareholders. Talk to your accountant about dividend strategies to lower your tax bill.
2. Recapture Tax (The Hidden Surprise!)
If you’ve been claiming capital cost allowance (CCA) to reduce taxable rental income over the years, you’ll have to pay some of that back when you sell.
How Does Recapture Work?
Let’s say you bought a rental property for $300,000, where 90% of the value is the building and 10% is the land.
Building Value:
90% × $300,000 = $270,000
Capital Cost Allowance (CCA) Claim Example:
Year 1: You claimed 4% of the building’s value as depreciation.
• $270,000 × 4% × 50% (first-year rule) = $5,400
second year: You claimed 4% of the remaining value.
• ($270,000 – $5,400) × 4% = $10,584
Total depreciation claimed = $5,400 + $10,584 = $15,984
Now You Sell for $950,000… and the CRA Wants That Back!
When you sell, the total depreciation claimed ($15,984) is added back to your income as recapture.
Recapture Tax Calculation:
$15,984 × 50% tax rate = $7,992
Total Tax Owed on the Sale
Now, let’s add it all up:
1. Capital Gains Tax: $162,500
2. Recapture Tax: $7,992
Total Tax Bill:
$162,500 + $7,992 = $170,492
Final Takeaway: Estimate Your Tax Liability in Seconds
Whenever you’re selling a rental property, a quick way to estimate your tax bill is to take your gain and multiply it by 25%.
For example:
$650,000 × 25% = $162,500
This gives you a ballpark of what you’ll owe. Of course, exact numbers depend on your income, province, and other deductions—so always consult your accountant before making moves!