Capital Gains Tax

Not a separate tax: how the 50% inclusion rate works

Despite the name, Canada has no standalone capital gains tax with its own rate. When you sell a capital asset such as stocks, an ETF, a rental property, or a cottage for more than it cost you, half of the gain (the 50% inclusion rate) is added to your taxable income and taxed at your marginal tax rate like any other income.

The practical consequence: the effective tax rate on a capital gain is half your marginal rate. If your marginal rate is 40%, a capital gain is taxed at an effective 20%. This makes capital gains the most lightly taxed form of investment income in a taxable account, ahead of eligible dividends for most incomes and far ahead of interest, which is fully taxable.

Only when you sell: realized vs. paper gains

Tax applies only to realized gains. If your shares are up $30,000 but you have not sold, that is a paper gain and no tax is due. You control the timing: hold and the tax is deferred indefinitely; sell and the gain lands in that year's income. This is why investors sometimes spread large sales across two calendar years or realize gains in a low-income year.

Two events can force realization without a sale you chose: a deemed disposition occurs at death (assets are treated as sold at fair market value, though transfers to a spouse defer this) and when you cease Canadian tax residency (departure tax on most assets).

The 2024-2025 saga: the increase that never happened

If you remember headlines about capital gains taxes going up, here is where things actually landed. In April 2024, the federal budget proposed raising the inclusion rate from 50% to 66.67% on gains above $250,000 per year for individuals, and on all gains for corporations and most trusts. The change was supposed to apply from June 25, 2024, and the CRA even began administering it before Parliament had passed it.

In January 2025, the government deferred the effective date to 2026. Then, on March 21, 2025, the proposal was formally cancelled. The inclusion rate remains 50% for everyone: individuals, corporations, and trusts, at every gain size (as of July 2026). If you made decisions in 2024 assuming a 66.67% rate, or you still see articles describing the higher rate as law, know that it never took effect.

The mechanics: proceeds, ACB, and selling costs

Your capital gain is: proceeds of disposition, minus adjusted cost base (ACB), minus selling costs such as commissions. The ACB is what the asset cost you, including purchase commissions and, for property, capital improvements.

For identical shares or fund units bought at different times, the ACB is averaged across all of them. Buy 100 shares at $10 and 100 more at $20, and every one of your 200 shares has an ACB of $15. You cannot pick the "expensive" shares to sell; the average applies across all accounts you hold that identical property in (registered accounts excluded).

Capital losses and the superficial loss rule

Capital losses offset capital gains, not other income. A loss must first be applied against gains in the same year; any excess becomes a net capital loss you can carry back up to 3 years (to recover tax already paid on past gains) or carry forward indefinitely.

The superficial loss rule blocks the obvious trick of selling to harvest a loss and immediately buying back. If you (or an affiliated person, including your spouse or your RRSP or TFSA) buy the identical property within 30 days before or after the sale and still hold it 30 days after, the loss is denied. The denied loss is added to the ACB of the repurchased shares, so it is deferred rather than lost, except when the repurchase happens inside a registered account, where it is gone for good.

Your home: the principal residence exemption

The gain on the sale of your designated principal residence is completely tax-free, one of the largest tax breaks in the Canadian system. Since 2016 you must report the sale on your tax return and designate the property to claim the exemption; failing to report can jeopardize it.

A family unit (you, your spouse, and minor children) can designate only one property per year. If you own both a house and a cottage, only one can be sheltered for any given year of ownership, and the gain on the other is taxable when sold. Properties flipped within 12 months of purchase are generally taxed as fully taxable business income, not capital gains, subject to exceptions for life events.

Registered accounts: where capital gains tax does not reach

There is no capital gains tax on anything you sell inside a TFSA, RRSP, FHSA, or RESP. Trade as often as you like; no gain is ever reported and no loss is ever claimable.

One nuance for the RRSP: growth is not tax-free, it is tax-deferred. Every dollar eventually withdrawn from an RRSP or RRIF is taxed as regular income at your full marginal rate, so a capital gain earned inside an RRSP ultimately loses the favourable 50% inclusion treatment it would have had in a taxable account. In a TFSA, by contrast, gains are never taxed at all.

Québec residents: Québec mirrors the federal treatment on the provincial return, including the 50% inclusion rate, the principal residence exemption, and loss rules, so the same logic applies to both layers of tax.