Can I use the lifetime capital gains exemption when I sell rental property or real estate?

The Canada Revenue Agency’s line 25400 page lists two kinds of disposition for the capital gains deduction: qualified small business corporation shares and qualified farm or fishing property. Rental property and other real estate are not named. So the question for a landlord is whether the thing being sold falls into one of those two kinds. This page describes the tests in the Act and does not say whether any particular sale qualifies.

What the deduction is for

Under s.110.6(2.1) of the Income Tax Act, an individual, other than a trust, who was resident in Canada throughout the year and disposed of a share that was a qualified small business corporation share of the individual at the time of disposition may deduct an amount up to the least of the amounts the subsection sets. Section 110.6(2) gives the same kind of deduction, on its own conditions, for qualified farm or fishing property. The CRA’s line 25400 guidance lists those two kinds of disposition, and reserves and trust allocations relating to them, and no other kind of property.

Real estate you own directly

A building or land held in your own name is real property. A qualified small business corporation share is, by definition, a share of the capital stock of a corporation, so directly held real property cannot be one. Under the s.110.6(1) definition, qualified farm or fishing property can include real or immovable property owned by the individual, a spouse or common-law partner, or a family farm or fishing partnership, but only if it was used in the course of carrying on a farming or fishing business in Canada by the persons the definition lists, and s.110.6(1.3) adds ownership-period and use conditions. The definition does not list renting a property to tenants as a qualifying use.

Shares of a company that owns property

Selling shares is a different transaction from selling a building. Under s.110.6(1) of the Income Tax Act, a qualified small business corporation share must, among other conditions, be a share of a small business corporation at the time of sale, and throughout the part of the preceding 24 months it was owned by the individual or a related person, be a share of a Canadian-controlled private corporation meeting an asset test: the part of the fair market value of its assets the definition requires must be attributable to assets used principally in an active business carried on primarily in Canada by the corporation or a related corporation, to qualifying shares or debt of connected corporations, or to a combination. The CRA’s T4037 guide says a share is considered a qualified small business corporation share if all of its listed conditions are met. Whether a company that holds property meets them is a question for an accountant who has seen its books.

The answer on whether your shares qualify walks through the share tests. Before any sale, ask an accountant how the property is held, what the company’s assets are, and whether the 24-month periods in the definition are met.