Capital gains tax is an important consideration for all Canadian investors and property owners. It’s a tax on the profit you make from selling assets. This guide provides a clear explanation of how to calculate it, which assets are subject to it, and the powerful strategies you can use to minimize your tax liability legally.
What is Capital Gain and Capital Loss?
A capital gain or loss is the financial result of selling (or being “deemed” to have sold) a piece of capital property. You have a capital gain when you sell a capital asset for more than its total cost. In contrast, you have a capital loss when you sell a capital asset for less than its total cost.
To calculate this, you need to know two key terms:
- Proceeds of Disposition: The selling price of the asset.
- Adjusted Cost Base (ACB): The original purchase price of the asset plus any expenses incurred to acquire it (e.g., brokerage commissions, legal fees, land transfer taxes). For real estate, the ACB can also be increased by the cost of capital improvements made to the property.
The basic formula is:
Capital Gain (or Loss) = Proceeds of Disposition – (Adjusted Cost Base + Expenses on Sale)
What is Capital Gains Tax in Canada?
Capital gains tax in Canada is the tax you pay on the profit (the “capital gain”) realized from selling an asset. It is not a separate tax, but rather, the taxable portion of the capital gain is added to your total income for the year. This additional income is then taxed at your personal marginal tax rate, which depends on your total income and your province of residence.
The capital gains inclusion rate determines the percentage of the capital gain that becomes taxable. For any disposition of capital property that occurs before January 1, 2026, Canada uses a 50% inclusion rate, meaning that only 50% of realized capital gains are subject to tax.
Key Changes to Capital Gains Inclusion Rate in 2026
The 2024 Canadian federal budget introduced essential changes to the capital gains tax system, which came into effect on June 25, 2024. However, in January 2025, the Government of Canada announced that the proposed changes to the capital gains inclusion rate are delayed until January 1, 2026. For the 2024 and 2025 tax years, the inclusion rate remains at 50% for all capital gains for all taxpayers.
Effective January 2026, the rules are as follows:
- For individuals: The inclusion rate will remain 50% for the first $250,000 of net capital gains in a year. For net capital gains exceeding $250,000, the inclusion rate will increase to 66.67% (two-thirds).
- For corporations and trusts: The inclusion rate will increase to 66.67% for ALL net capital gains.
These changes make the tax treatment of capital gains more comparable to other forms of income, such as interest, dividends, and employment income, for high-net-worth individuals. For official details, refer to the CRA’s update on the capital gains taxation changes.
The table below shows the approximate top effective tax rates on capital gains for 2025 and the proposed rates for 2026.
| Province/Territory | 2025 Top Effective Tax Rate & 2026 Rate (Gains =< $250,000) | 2026 Rate (Gains > $250k – 66.67% Inclusion) |
|---|---|---|
| Alberta | 24.00% | 32.00% |
| British Columbia | 26.75% | 35.67% |
| Manitoba | 25.20% | 33.60% |
| New Brunswick | 26.25% | 35.00% |
| Newfoundland & Lab. | 27.40% | 36.53% |
| Nova Scotia | 27.00% | 36.00% |
| Ontario | 26.77% | 35.69% |
| Prince Edward Island | 25.69% | 34.25% |
| Quebec | 26.66% | 35.54% |
| Saskatchewan | 23.75% | 31.67% |
| Northwest Terr. | 23.53% | 31.37% |
| Nunavut | 22.25% | 29.67% |
| Yukon | 24.00% | 32.00% |
Key Exemptions on Capital Gains Tax
The Government of Canada provides a significant tax benefit for homeowners with the Principal Residence Exemption (PRE). This allows selling a designated principal residence without paying any capital gains tax on the profit. An important note is that even if the full gain is exempt, you must report the sale of your principal residence on your tax return (Schedule 3 and Form T2091). Failure to do so can result in penalties. For more information, see the CRA’s page on Sale of your principal residence.
In addition, the Lifetime Capital Gains Exemption (LCGE) allows individuals to claim an exemption on gains from the sale of qualified small business corporation shares or qualified farm/fishing property. The LCGE limit was increased to $1.25 million, effective for sales on or after June 25, 2024. This change was not delayed with the inclusion rate change.
When Capital Gains Tax Must Be Paid
Capital gains tax is not payable until the year in which you actually sell or dispose of an asset for a profit. You report capital gains and losses when filing your annual income tax return for that year.
The taxable portion of any capital gains realized will be added to your income and taxed at your applicable federal and provincial marginal tax rates. It’s essential to be strategic in timing asset sales to avoid pushing yourself into a higher tax bracket.
How to Calculate Tax on a Capital Gain
Calculating tax on a capital gain in Canada involves determining your adjusted cost base, essentially your original purchase price plus any additional purchase fees. Here’s a step-by-step guide to calculating your capital gains tax:
Step 1: Calculate your capital gain or loss
To find your capital gain, subtract your ACB from the selling price of your asset.
For example, if you bought 40 shares of a stock at $10 each and later purchased 20 more shares at $12.50 each, your total ACB would be: (40 shares × $10) + (20 shares × $12.50) = $650
If you sold 30 of those shares for $15 each, you would receive $450. Your capital gain is the difference between the selling price and the ACB of those 30 shares: $450 – (30 shares × $650 ÷ 60 total shares) = $125.10
Step 2: Determine your taxable capital gain
In Canada, only a portion of your capital gain is taxable. You’ll pay tax on 50% of your annual capital gains up to $250,000.
In the example above, since your capital gain of $125.10 is less than $250,000, only 50% of it ($62.55) would be taxable.
Step 3: Add the taxable portion to your income
The taxable portion of your capital gain is added to your total taxable income for the year. Your marginal tax rate will determine the tax you owe on this additional income. Many financial institutions track your ACB and capital gains, simplifying the calculation process.
However, if you manage your investments, you must keep accurate records and perform these calculations yourself. Remember, the taxable amount is the difference between the selling price and the ACB. If you have any doubts or questions, consult a tax professional for guidance specific to your situation.
What Assets are Subject to Capital Gains Tax?
Capital gains tax in Canada applies whenever you sell any of the following types of property for more than you paid for it. Common examples include:
| Types of Property | Examples |
|---|---|
| Investments | – Stocks, bonds, mutual funds, and exchange-traded funds (ETFs) held in non-registered accounts. – Stock options, once the acquired shares are sold. – Cryptocurrencies like Bitcoin and Ethereum. – Less common investments like income trusts, REITs, and mortgage-backed securities. |
| Real estate | – Rental properties (e.g., apartment buildings, condos, plexes) – Vacation properties (e.g., cottages, cabins, or vacation homes) – Undeveloped land, farmland, and commercial real estate (real estate held for business purposes rather than personal use) – A portion of your principal residence if you used it to earn income (e.g., rented out a room or floor). |
| Precious metals | Gold, silver, platinum, and palladium in the form of bullion, bars, or coins. |
| Business assets | – Equipment, machinery, and buildings owned by a business. – Intangible assets include patents, trademarks, franchises, and licenses. – Inventory – any appreciation when inventory is sold over its cost. |
In addition to the major asset classes covered above, some personal use assets, such as non-primary residences, collectibles like artwork or antiques, and vehicles like cars, boats, or planes, can also be subject to capital gains tax when used personally and sold for more than their original purchase price.
How Does Capital Gains Tax Apply to Inherited Assets?
Canada does not levy any inheritance tax or estate tax. As a result, beneficiaries do not need to pay any capital gains tax immediately when assets are transferred to them through inheritance.
However, capital gains tax still applies when the original owner passes away. Any accrued capital gains on assets they owned are deemed to be realized immediately before death. The deceased individual’s estate is responsible for paying capital gains tax on these assets as if they were sold at their fair market value on the date of death.
For example, if you inherit a rental property purchased by the deceased for $300,000 years ago and now worth $500,000, your estate must pay capital gains tax on the $200,000 gain. The tax would be based on the deceased’s inclusion rate and marginal tax rate.
As the beneficiary who inherits the property, you acquire it at a stepped-up cost base equal to the fair market value when you inherited it. In this example, the stepped-up cost base is $500,000 since that was the property’s value when you inherited it.
When you eventually sell the inherited property, capital gains tax will only apply to any appreciation after you inherit it. For example, if you sold the property for $600,000 a few years later, you would only pay tax on the $100,000 capital gain.
The stepped-up cost base prevents double taxation and allows beneficiaries to inherit assets without incurring significant capital gains tax, deferring it until disposition.
Here is an overview of how capital gains tax applies when inheriting an appreciated asset:
| Description | Tax Impact |
|---|---|
| Beneficiary inherits the asset | No immediate tax |
| The original owners passes away | Capital gains tax is paid as if the asset were sold upon death |
| Beneficiary’s cost base steps up to FMV at the time inherited | Reduces eventual capital gain |
| The beneficiary pays capital gains when later selling the inherited asset | Based only on post-inheritance appreciation |
Here are some other key points about inheriting assets and capital gains tax in Canada:
- Multiple beneficiaries – If more than one person inherits an asset, the capital gain is divided proportionately based on each person’s interest.
- Spousal rollovers – Assets inherited by a surviving spouse can typically be transferred tax-free to defer capital gains.
- Principal residence exemption – Inheriting the family home or cottage does not trigger capital gains tax due to the principal residence exemption.
- Estate planning – Proper estate planning strategies can help minimize the burden of capital gains tax on death.
Beneficiaries do not pay capital gains tax immediately when inheriting assets in Canada. The deceased’s estate pays tax on accrued gains at death, providing the beneficiary with a stepped-up cost base for eventual capital gains tax when the inherited asset is sold.
Strategies to Avoid or Reduce Capital Gains Tax
While it may be challenging to eliminate capital gains tax, several strategies can help maximize deductions and legally minimize the amount of tax owed:
Use Tax-free and tax-deferred accounts (TFSA, RRSP)
This is the most effective way to avoid the tax entirely on investment growth.
- Tax-Free Savings Account (TFSA) – Assets held in a TFSA can grow tax-free, and selling investments within a TFSA does not trigger capital gains tax.
- Registered Retirement Savings Plan (RRSP) – Capital gains realized within an RRSP are tax-deferred. No tax is payable until funds are withdrawn from the RRSP.
Claim capital losses to offset gains
Tax-loss harvesting involves strategically realizing losses to offset capital gains. This technique can offset increases in the current tax year or be retroactively applied to the previous three tax years. Losses can also be carried forward indefinitely to offset future capital gains.
Be aware of “superficial loss” rules that disallow claiming a capital loss on assets reacquired within 30 days of selling at a loss.
Defer asset sales to lower-income years
Develop an overall financial plan to strategically sell assets in lower-income years. This takes advantage of lower marginal tax rates in those years.
Deferring tax on accrued capital gains by delaying asset sales provides significant advantages, especially for assets with decades of appreciation.
Donate appreciated assets directly to charity
Donating publicly traded securities directly to a charity eliminates the capital gains tax on the appreciation and provides you with a donation receipt for the full market value.
Track expenses to increase the cost base
Capital improvements, commissions, and expenses related to acquiring or selling investments increase the cost base, reducing eventual capital gains. Tracking expenses diligently can provide substantial tax savings.
Proper tax planning and innovative implementation of these capital gains reduction strategies, combined with professional tax advice, can help minimize an investor’s overall tax burden.
FAQs about Capital Gains Tax in Canada
Is capital gains tax levied at the federal and provincial levels?
Yes, capital gains tax in Canada comprises both federal and provincial components based on your taxable income and province of residence. The inclusion rate is set federally, while the marginal rate depends on provincial brackets.
What happens if I have a net capital loss for the year?
If your capital losses exceed your capital gains in a given year, you will have a net capital loss that can be applied against capital gains in any of the three preceding years or carried forward indefinitely to offset future capital gains.
Can I split capital gains income with my spouse?
Unfortunately you cannot split capital gains income directly with your spouse. However, strategies like jointly owning assets can help optimize the annual $250,000 capital gains exemption for each individual.
Is capital gains tax payable on death in Canada?
No, capital gains tax is not payable immediately when someone dies in Canada. However, the deceased's estate must pay capital gains tax on assets deemed disposed of at death.
How are stock dividends treated for capital gains tax?
Stock dividends are considered capital gains and taxed based on the inclusion rate of capital gains. This is different from cash dividends, which are taxed at preferential dividend tax rates.
Can capital losses be claimed in a TFSA or RRSP?
No, capital losses realized within a TFSA or RRSP cannot be claimed to offset capital gains outside of the registered accounts. The accounts shelter capital gains and losses.
Can capital losses be carried back more than three years?
Unfortunately capital losses can only be carried back up to 3 years prior to the current tax year. The carry forward period for net capital losses is indefinite.
Is intellectual property subject to capital gains in Canada?
Yes, disposing of intellectual property like patents, licenses, trademarks, and copyrights for more than the cost base results in taxable capital gains in Canada.
Can capital losses from personal use of property be claimed?
No, capital losses realized on personal use property like vehicles, furniture, and collectibles are considered personal and cannot be claimed against capital gains.
What happens if I forget to report capital gains?
If you fail to report capital gains, you may be reassessed by the CRA to pay the tax owing plus interest and potential penalties. You can voluntarily correct mistakes by filing an Adjustment Request.
Do I need to calculate capital gains in a registered account?
You do not need to track or calculate capital gains and losses realized within registered accounts like RRSPs, TFSAs, RESPs, etc. All growth within these accounts is tax-sheltered.
Can I deduct investment fees and expenses?
Certain investment fees and expenses, like interest and broker commissions, can increase your adjusted cost base and reduce eventual capital gains. It's beneficial to keep detailed records of these costs.
Is crowdfunding considered capital gains income?
If you receive shares or equity in a company or property through crowdfunding, selling those assets down the road after their value increases could generate capital gains income.
Does capital gains tax apply to foreign investments?
Canadian residents must pay capital gains tax on profits from selling all foreign stocks, real estate, and other overseas investments converted into Canadian dollars.
How are stock options treated for capital gains purposes?
Exercising employee stock options to acquire shares is not a disposition. However, selling the shares later at a profit would lead to capital gains.
Can I deduct capital losses against regular income?
Unfortunately, capital losses can only be used to offset taxable capital gains, not other sources of income like employment earnings, interest, or dividends.
The Bottom Line
Capital gains tax is an important factor to consider when investing and selling assets in Canada. There are legitimate strategies to help minimize capital gains tax liability, such as capital losses, tax-sheltered accounts, donations, and tax deferral. Consult a qualified tax professional to ensure you develop the optimal plan based on your specific financial situation.
Understanding capital gains tax is crucial for all Canadian investors and property owners. Get started on your personal finance education today and equip yourself to make wise decisions that maximize returns while minimizing unnecessary taxes. Check back regularly for more guides at LifeBuzz to help you achieve your financial goals.
