A guide on capital gains tax in Canada

Note: On March 21, 2025, Prime Minister Mark Carney announced that his government would cancel the planned increase in the taxable portion of capital gains. Under current rules, only 50% of your capital gains will be taxable.

Ever thought about selling your cottage, only to realize how much its value has soared? Or maybe you cashed out on some tech stocks and were pleasantly surprised by the hefty profit. Moments like these can be exciting — until you remember capital gains tax, the amount you owe to the government when you sell an asset for more than you paid.

In this guide, we’ll break down how capital gains tax can impact your bottom line and the ways to minimize them. Whether you’re offloading an investment property or cashing out a stock portfolio, let’s learn how to avoid surprises and keep more of your hard-earned profit.

What are capital gains (and losses)?

A capital gain occurs when you sell (or are deemed to have sold) an asset for more than you originally paid. For instance, if you bought stocks for $1,000 and later sold them for $1,500, the extra $500 is your capital gain. A capital loss, on the other hand, happens when you sell an asset for less than you paid. Using the same example, if you bought stocks for $1,000 but sold them for $800, you’d incur a $200 capital loss.

Capital gains and losses don’t apply to just any sale; they specifically apply to capital property. According to the Canada Revenue Agency (CRA), capital property includes depreciable property and any property that, if sold, would result in a capital gain or loss. This generally refers to assets you buy for investment purposes or to earn income (for example, cottages, stocks and bonds, rental properties, or business equipment).

What is the capital gains tax in Canada?

Capital gains tax is the amount you owe to the government as taxes when you sell, or are deemed to have sold, an asset for more than you paid. Capital gains are only partially taxed, unlike other passive income sources (like interest or dividends). The percentage of the gain you must report in your taxes is known as the inclusion rate. 

Currently, you only pay taxes on 50% of your gains, which is added to your overall income when filing taxes. Because Canada has a progressive tax system, the tax amount you owe depends on:

• Your total income (including the taxable portion of your capital gains)
• Your federal and provincial/territorial tax brackets
• Any credits, deductions, or exemptions

As you earn more, you move into higher tax brackets. So, if your capital gain significantly increases your total income, you could end up paying a higher marginal tax rate.

When do you pay capital gains tax?

You only pay tax on realized gains, meaning you’ve actually sold the asset and locked in your profit. If you continue to hold onto an asset that’s increased in value, any gains remain “unrealized,” and you generally won’t owe taxes until you sell. This effectively allows you to defer capital gains taxes as long as you keep the asset, giving you a measure of control over when you face the tax liability.

Things to know about the Canada capital gains tax changes

Previously, Canada applied a single capital gains inclusion rate of 50% for all taxpayers — individuals, trusts, and corporations. This meant that if you sold a capital property and made a gain, you would only add half of that profit to your taxable income.

However, on June 25, 2024, the federal government introduced measures to increase the capital gains inclusion rate. Once in effect, Individuals would have to pay 50% on the first $250,000 of a capital gain, and 66.67% on any portion exceeding $250,000.

However, shortly after tabling these changes, the government deferred their implementation to January 1, 2026. Until the new effective date, the original 50% inclusion rate remains in place for all taxpayers. The capital gains tax rules may change again following the 2025 federal election.

Here’s an example of how this rule might work in practice. Suppose you sell an investment property for a $350,000 profit in a single year. Under the current system (50% inclusion rate), you’d add $175,000 (half of $350,000) to your taxable income. That amount would then be taxed at your marginal tax rate.

However, if the proposed rules (starting January 1, 2026) were in effect, you’d split that $350,000 gain into two parts:

• First $250,000: 50% is taxable ($125,000)
• Remaining $100,000: 66.67% is taxable (about $66,670)

In total, you’d report $191,670 of taxable capital gains instead of $175,000 — an increase of $16,670. The exact amount you owe will depend on your marginal tax rate.

How to calculate capital gains tax?

To calculate capital gains tax in Canada, you need to first figure out how much you profited from the sale (your capital gain), then determine what portion of that profit is taxable (the inclusion rate), and finally, add that amount to your overall income.

Step 1: Determine net capital gain

To calculate the net capital gain (or loss), you need to understand the following three amounts:

• Proceeds of sale: The total amount you received from selling the asset.
• Adjusted cost base (ACB): The original purchase price plus fees or costs that add to its value, like renovations for a property or commissions paid on stocks.
• Selling expenses: Costs you pay specifically to sell the asset, such as real estate commission, legal fees, or brokerage charges.

Using these amounts, you can calculate your capital gain or loss with the formula:

Capital gains/losses = Proceeds of Sale - (ACB + Expenses)

Imagine you bought a vacation house for $200,000 and paid an additional $5,000 in legal fees, land transfer tax, and other closing costs. Your ACB would be $205,000 (the purchase price plus these extra costs). Later, you sell the property for $280,000, but you pay $10,000 in real estate commissions and other selling expenses. Your net proceeds from the sale are $270,000.

• Proceeds of sale: $280,000 (sale price)
• Adjusted cost base: $200,000 (purchase price) + $5,000 (closing costs) = $205,000
• Selling expenses: $10,000 commission

Your net capital gain is the difference between the proceeds of sale and your ACB and selling expenses:

Net capital gain = $280,000 − ($205,000 + $10,000) = $65,000

Step 2: Apply the capital gains inclusion rate

From our above example, you ended up with a $65,000 net capital gain. Under the current rules, Canada’s inclusion rate for capital gains is 50%, meaning you include half of that gain, $32,500, in your taxable income for the year.

Even if proposed changes were already in effect, you’d still stick to the 50% inclusion rate because your $65,000 gain is well below the threshold of $250,000. 

Step 3: Include the taxable portion in your income

Once you know your net capital gain and have applied the appropriate inclusion rate, the resulting amount is added to your other income sources for the year. Because Canada’s tax system is progressive, adding even a modest capital gain can push you into a higher bracket, meaning you could end up paying more tax on that additional portion of your income.

Here’s how tax on capital gains breaks down:

• Under $250,000 in capital gains: Currently (and under the proposed rules up to $250,000 in gains) you have to pay taxes on 50% of your net capital gain. Even if you land in the highest tax bracket of 54.8% applicable in some provinces, your total capital gain is effectively taxed at about half that rate — roughly 27.4%. If your total income is lower or your province has lower rates, you’ll pay less than 27.4%.

• Above $250,000 in capital gains (Starting January 1, 2026): Under the proposed changes, any gains beyond $250,000 may face a 66.67% inclusion rate. In the top tax bracket of 54.8%, this could result in a maximum effective rate of approximately 36.5% (66.67% of 54.8%) on that amount above $250,000. As most Canadians don’t reach the highest tax brackets, this rate would be lower, but it’s still a substantial increase compared to the standard 50% inclusion.

How does capital gains tax apply to real estate sales?

Selling real estate doesn’t always trigger capital gains tax; let’s see how to avoid capital gains tax on property in Canada.

In most cases, if the property qualifies as your principal residence — the home you or your family live in — the principal residence exemption shields you from paying capital gains tax upon sale. This exemption can eliminate the tax on any profit you make. If you own real estate strictly for investment purposes, like a rental unit or a vacation property you don’t use as your main home, you owe capital gains tax on any profit made when you sell.

How to minimize your capital gains tax liability

1. Offset your capital gains with capital losses

One of the most straightforward ways to reduce the tax you owe on capital gains is to use capital losses to offset them. If you sold an asset at a loss, you can apply those losses to your current gains.

Suppose you sold shares of Company A for a net capital loss of $5,000, and also sold a rental property for a net capital gain of $20,000. By subtracting the $5,000 loss from the $20,000 gain, you’ll only pay tax on $15,000 instead of the full amount.

The CRA typically requires you to apply current-year capital losses to your taxable capital gains first. Any leftover loss can then be used in two ways:

• Apply the losses to any of the three previous tax years, reducing taxable capital gains you reported in those years.
• Carry forward the losses indefinitely to reduce taxable gains in future years.

Keep in mind that capital losses can only offset capital gains. They do not apply to regular income or dividends.

2. Use tax-advantaged accounts

Holding your investments in tax-advantaged accounts can help either eliminate or defer taxes on the gains you earn. Here’s how a few popular accounts can work for you:

• Tax-free savings account (TFSA): Any investment gains grow completely tax-free in a TFSA account. You also don’t have to pay any tax when you withdraw money.
• Registered retirement savings plan (RRSP): Contributions are tax-deductible in an RRSP account, reducing your taxable income in the year you contribute. Investment gains are tax-deferred until you withdraw funds, typically during retirement when you may be in a lower tax bracket.
• First home savings account (FHSA): Designed for first-time homebuyers, FHSAs allow tax-deductible contributions and tax-free investment growth. When you withdraw funds for a qualifying home purchase, those amounts are not taxed as well.
• Registered education savings plan (RESP): The investment grows tax-deferred in an RESP account. Upon withdrawal, the government grant and investment growth portions are taxed at the student’s income level, which is usually low. The principal (your contributions) is not taxed upon withdrawal.

3. Apply for a capital gains deduction

Certain types of capital gains qualify for a lifetime capital gains exemption (LCGE), which can significantly reduce, or even eliminate, the taxable portion of your gains. This exemption is available if you sell qualifying assets, such as:

• Shares of a qualified small business corporation (QSBC)
• Qualified farm or fishing property (QFFP)
• Taxable capital gains allocated from a QSBC or QFFP by a trust

The exemption limit depends on when you dispose of your qualifying property. For dispositions before June 25, 2024, the LCGE is $1,016,836. For dispositions after June 24, 2024, the limit would increase to $1,250,000. Since only 50% of a capital gain is taxable, these limits translate into a maximum capital gains deduction of:

• $508,418 (50% of $1,016,836) for period 1
• $625,000 (50% of $1,250,000) for period 2

4. Claim a capital gains reserve

If you sell an asset but don’t receive the full payment immediately, you may be eligible to claim a capital gains reserve. This strategy allows you to defer part of your taxable capital gain over several future tax years, easing the immediate tax burden. For example, imagine you sell an investment property for $200,000, but you only receive $50,000 in the first year, with the remainder payable in installments over the next four years. By distributing the capital gain of $200,000 over multiple years, you can potentially avoid moving into a higher tax bracket in any single year. 

Generally, most reserves allow you to defer the gain over a maximum period of four years, which means the total gain is eventually included in income over five years. There are also special situations where a longer reserve period of nine years is permitted:

• Transfers of family farm or fishing property to your child
• Sales of small business corporation shares
• Gifts of non‑qualifying securities made to a qualified donee

5. Co-own your assets with a partner

When you co-own an asset with your partner, the capital gain from its sale is divided between you two, potentially lowering the taxable amount for each individual. If you and your partner co-own the capital property equally, any gain will be split equally between both of you. For example, if you sell a vacation house and realize a $200,000 capital gain, each of you would have a $100,000 share of the gain. With the current 50% inclusion rate, each partner would only include $50,000 (which is 50% of $100,000) in their taxable income. 

6. Use life insurance to reduce your capital gains tax burden for deemed disposition

Life insurance can be a valuable tool in managing the tax impact when assets are subject to a deemed disposition — events where the tax authorities consider that an asset has been sold even if no actual sale has taken place (often in estate planning).

For example, imagine you have a portfolio of investments worth $1,000,000 that has accrued substantial unrealized capital gains. Upon your death, the tax rules trigger a deemed disposition, and you face a capital gains tax liability of, say, $200,000. If you have a life insurance policy with a death benefit of $250,000, the payout from the policy can be used to cover the tax liability. This ensures that your heirs receive the full value of your estate without having to liquidate investments to pay the taxes.

Also read- You may no longer have enough life insurance thanks to capital gains tax hike