Q: I am considering selling my rental property, which I have owned and rented out for a year. But my realtor said I should own it for at least two years for CRA to consider the profit to be capital gain rather than income. What is this about?

A: The issue is whether the sale of your investment property would be treated as income (fully-taxed) or as capital gain (half-exempt).

Your Intention When You Purchased/Sold Determines Tax Treatment

This treatment depends on what your intention was when you purchased the property, and when you sold it. Generally, if you purchased the property primarily to make a profit on the sale, that sale profit would be considered fully-taxable income. If you purchased the property primarily intending to make profit from rental income and incidentally made a profit on the sale, it would be a capital gain and only 50% of the profit on the sale would be taxable.

The problem is, when you sell, is CRA going to question your intentions? If so, how do you prove that you purchased in order to rent it out, and not with the intention of selling at a profit?

How CRA Infers Your Intention

CRA’s own bulletin says, in effect, that there is no clear test to indicate whether the intention was rental (hence a capital gain on sale) or whether the intention was profit on the sale (hence fully-taxed income on the profit on the sale). It appears that if you sold and declared the profit as capital gain, and if CRA chose to investigate further, someone would have to look at the specifics of your situation from all angles to determine by inference what your intention may have been. If this investigation showed convincing evidence that the intention was to earn rental profit, that would be enough to have the profit treated as a capital gain.

In the excerpt from the CRA Bulletin below, you’ll see that the length of time the property was owned is indeed a factor in inferring your intention and therefore how the profit will be taxed. However it doesn’t specify any particular length of time as the deciding factor.

‘Two Years’ May Refer to a Legal Precedent, Rather Than Tax Law

It’s possible the two-year period quoted by your real estate agent is based on a tax court ruling, where a person (‘Mr Landlord’) held the property for two years and successfully argued the intention was rental. In that case, our system of common law, which is based on legal precedents, would mean that future defendants could refer back to the precedent set in that case; a defendant might win their case on the basis that Mr Landlord won his. In that event, even though there’s no law saying CRA must treat two-year holdings as capital gain, the system of legal precedents would make it work almost as if there were a law.

CRA’s Bulletin On The Treatment of Real Estate Sales

Here is the relevant text from CRA’s bulletin. When you sell, you would want as many of the indicators around the factors listed below to lean in the direction of ‘purchase to earn rental profit’ rather than ‘profit-via-resale.’ Emphasis and notes in square brackets are mine.:

  1. There is no provision in the Income Tax Act which describes the circumstances in which gains from the sale of real estate are to be determined as being either income or capital. However, in making such determinations, the courts have considered factors such as those listed below: (The list is not intended to be exclusive of any other factor.)

(a) the taxpayer’s intention with respect to the real estate at the time of its purchase; [i.e., when you purchased it, was your primary intention to earn a profit via rental?]

(b) feasibility of the taxpayer’s intention; [i.e., was it reasonable to assume you could earn a profit via rental?]


(d) extent to which intention carried out by the taxpayer; [i.e., did you manage to earn a profit via rental?]

(e) evidence that the taxpayer’s intention changed after purchase of the real estate; [i.e., even if you started out intending to earn a profit via rental, did you later change your mind and decide to earn a profit via sale instead? Or did you just decide to redistribute your investments?]

(f) the nature of the business, profession, calling or trade of the taxpayer and associates; [i.e., do you typically trade in real estate, with the intention of buying low and selling high?]


(h) the length of time throughout which the real estate was held by the taxpayer; [note that no particular length of time is specified; just that the longer you held the property, the more likely it is that your intention was rental income rather than sale-at-a-profit.]

(k) factors which motivated the sale of the real estate; [see factor (e) above]

 (l) evidence that the taxpayer and/or associates had dealt extensively in real estate. [see factor (f) above]