Capital Gains
A capital gain arises when you sell a capital property — such as stocks, mutual funds, ETFs, real estate (other than your principal residence), or cryptocurrency — for more than its adjusted cost base (ACB). In Canada, the taxable portion of the gain is determined by the inclusion rate and added to your income for the year.
The current inclusion rate is **50% flat** for all individual capital gains. For every $1,000 of capital gain, $500 is added to your taxable income and taxed at your marginal rate. The previous government's proposal to raise the inclusion rate to 66.67% on gains above $250,000 was **deferred indefinitely on 21 March 2025** by the Carney government, so the 50% flat rate applies to all years 2024 onward.
Capital losses can offset capital gains in the current year, be carried back 3 years, or carried forward indefinitely. Your principal residence is generally exempt from capital gains tax through the Principal Residence Exemption. Selling investments in a TFSA or RRSP does not trigger capital gains.
How it works
A capital gain only becomes taxable when you actually dispose of the property — by selling it, gifting it, or through a deemed disposition at death or emigration. Paper gains on investments you still hold are never taxed, no matter how much they've appreciated. Whether a profit counts as a capital gain versus fully taxable business income depends on factors like how frequently you trade and your intention at purchase — frequent, short-term trading can be reclassified by the CRA as business income with no inclusion-rate discount at all.
Your ACB, the LCGE, and the Principal Residence Exemption are the three main mechanisms that shelter capital gains from tax — either by increasing the cost base used to calculate the gain, or by exempting the gain outright for qualifying small business shares, farm property, or your home. Capital losses work the other way, offsetting gains in the same year or carrying back three years or forward indefinitely.
You report capital gains and losses on Schedule 3 of your T1 return, using the T5008 and T3/T5 slips your broker or fund issues each year as your starting record. Because only realized gains are taxed, timing when you sell — deferring a disposition to a lower-income year, or harvesting losses against gains before year-end — is a common and legitimate planning strategy.
Example: Selling stock at a gain
You bought shares for $30,000 (your ACB) and sold them later for $50,000, a capital gain of $20,000. At the 50% inclusion rate, $10,000 of that gain is added to your taxable income — not the full $20,000.
If your marginal rate is 40%, the tax on that $10,000 taxable portion is $4,000. Your effective tax rate on the original $20,000 gain works out to 20% — half of what it would be if the same amount were taxed as ordinary income.
Frequently asked questions
Do I pay tax on capital gains earned inside a TFSA or RRSP?
No. Investments held in a TFSA or RRSP grow and can be sold without triggering any capital gains tax, since those accounts are tax-sheltered — the usual capital gains rules only apply to non-registered accounts.
What's the difference between a capital gain and business income?
Business income is fully taxable and generally applies when trading is frequent, short-term, or done with a clear profit-seeking intention; a capital gain applies to longer-term investment holdings and only half is taxable.
What happens if I have a capital loss instead of a gain?
A net capital loss can offset capital gains in the same tax year, be carried back up to three prior years to recover tax already paid, or be carried forward indefinitely to offset future gains.
Related Terms
Inclusion Rate
The inclusion rate determines what portion of a capital gain is included in your taxable income.
ACB (Adjusted Cost Base)
The Adjusted Cost Base (ACB) is the cost of an asset for tax purposes, used to calculate capital gains or losses when the asset is sold.
Principal Residence Exemption
The Principal Residence Exemption allows you to eliminate all or part of the capital gain when you sell your home, provided you designate it as your principal residence for each year you owned it.
LCGE (Lifetime Capital Gains Exemption)
The Lifetime Capital Gains Exemption allows qualifying Canadians to shelter up to $1,275,000 (2026, up from $1,250,000 in 2025) of capital gains from the sale of qualifying small business corporation (QSBC) shares, qualified farm property, or qualified fishing property.