Capital Gains Taxation in Canada: Complete 2025 Guide

What Is a Capital Gain? What Triggers Capital Gains Tax?

A capital gain arises when you sell or are deemed to have sold a capital asset for more than its “adjusted cost base” (ACB) plus selling expenses. Capital assets include:

• Stocks, bonds, mutual funds, ETFs, crypto assets
• Real estate (cottages, rental property, land, commercial buildings, but not usually your principal residence)
• Business assets and shares of private companies
• Precious metals, collectibles, and certain personal property (over $1,000)

A capital loss occurs when you sell an asset for less than its ACB plus selling expenses. Capital losses can offset capital gains (see below).

Common Triggers of Capital Gains Tax

• Selling investments (stocks, crypto, real estate) for a profit
• Being deemed to have disposed of property (e.g., gifting assets, death, emigrating from Canada)
• Redeeming mutual funds, selling business shares, or receiving insurance payouts above cost

How Much of a Capital Gain Is Taxed? (Inclusion Rate & Calculation)

• Inclusion Rate (2025): 50% of your net capital gains are included in your taxable income. This is called the inclusion rate.
• Taxed at Your Personal Rate: The included portion is added to your other income and taxed at your marginal rate.
• Formula Example: Sell stock for $12,000, ACB $8,000, commissions $200.
  Gain = Sale price ($12,000) - ACB ($8,000) - expenses ($200) = $3,800
  Taxable capital gain = $3,800 x 50% = $1,900 (added to income)
• Capital Losses: Can only be applied against capital gains, not regular income. Unused losses carry forward indefinitely.
• Superficial Losses: Losses are denied if you (or an affiliated person) buy back the same asset within 30 days.

Special Cases: Certain assets (Canadian small business shares, qualified farm/fishing property) may qualify for a lifetime capital gains exemption—see Business Tax Credits for details.

Principal Residence Exemption: Avoiding Capital Gains Tax on Your Home

The principal residence exemption allows you to avoid capital gains tax when you sell your main home, provided:

• You (or your family) ordinarily inhabited the home during each year you owned it
• You designate the property as your principal residence for each year on your tax return (Form T2091)
• Only one property per family unit per year can be designated (includes spouses and minor children)

When Capital Gains Tax Applies to Real Estate

• Second Homes & Cottages: Sale is taxable unless you have available years to designate as principal residence
• Rental or Investment Properties: Fully taxable on sale, minus eligible expenses and ACB
• Flipping or Frequent Sales: If CRA determines your intent was to profit (not inhabit), you may be taxed as business income (full inclusion, not 50%)
• Change of Use: E.g., converting a rental to personal use (or vice versa) triggers a deemed disposition at fair market value
• Foreign Property: Canadian residents pay capital gains tax on global assets; foreign tax paid may be credited

Reporting Capital Gains (and Losses) on Your Tax Return

1. Calculate the Gain/Loss: For each asset sold, determine the proceeds of disposition (sale price), subtract the ACB and any selling expenses.
2. Complete Schedule 3: Report all capital transactions on Schedule 3 of your T1 return.
3. Report Principal Residence Sales: Include address, year of acquisition, and period designated as principal residence (T2091 form).
4. Include All Gains/Losses: Stocks, real estate, crypto, business shares, mutual funds, collectibles, etc.
5. Apply Losses: Net capital losses can only offset capital gains (current or prior 3 years; unused losses can carry forward indefinitely).
6. Pay Any Tax Owing: Capital gains are included in your taxable income for the year in which the sale occurred.

Tip: Non-residents and emigrants face special reporting and withholding requirements—consult a tax advisor.

Strategies to Minimize Capital Gains Tax in Canada

• Use Tax Shelters: Hold investments inside a TFSA or RRSP to defer or eliminate capital gains tax until withdrawal (or permanently, in the case of TFSAs).
• Harvest Losses: Sell investments at a loss before year-end to offset gains elsewhere (“tax-loss harvesting”). Watch for superficial loss rules.
• Time Your Sales: Defer selling until a lower-income year, or spread large gains over multiple years if possible.
• Split Income: Transfer or gift investments to a spouse in a lower tax bracket (beware of attribution rules).
• Maximize Principal Residence Exemption: Designate the home with the largest gain as your principal residence, especially if you own multiple properties.
• Take Advantage of the Lifetime Capital Gains Exemption (LCGE): Up to $1,000,000 (2024, indexed) for qualified small business shares, farm or fishing property.
• Deduct Carrying Charges: Claim eligible investment expenses (e.g., interest on money borrowed to invest) against capital gains.
• Donate Appreciated Securities: Gifts of publicly traded shares to charity are exempt from capital gains tax.

Pro Tip: Tax rules are complex, especially for business sales, real estate, or cross-border investments. Consult a tax professional for personalized strategies.

Frequently Asked Questions: Capital Gains Tax in Canada