Capital gains tax in Canada, explained

Selling high-performing stocks or a cottage property can reap significant profits, and those moments are worth celebrating. But while you’re enjoying the spoils of your investments, keep in mind that you’ll eventually have to pay tax on them. In Canada, most gains on capital assets are taxed. Let’s look at how capital gains tax works in Canada and strategies to avoid paying more taxes than you need to come tax time. 

What are capital gains?

When you sell an asset or investment for more than you bought it, you have a capital gain. Let’s say you purchased $1,000 worth of stock and then sold your shares for $1,500 two years later. In this case, you have a capital gain of $500. On the other hand, when your assets depreciate in value and you sell them for less than you bought, you have a capital loss.

Capital gains and losses can occur with many types of investments and property, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), rental properties, cottages and business assets. Capital gains and losses generally do not apply to personal-use property where the value generally decreases over time, such as cars and boats. There may be exceptions for personal-use property like rare coins or collector cars. Capital gains tax does not apply to real estate that qualifies as your principal residence for all years you owned it.

How are capital gains taxed in Canada?

Capital gains are often considered a form of “passive income.” However, they’re taxed differently than other passive income sources, such as interest income, Canadian dividends and foreign dividends. They’re also taxed differently than employment income, due to what’s known as the capital gains inclusion rate. In this sense, capital gains are unique.

The first thing to know is that capital gains are added to your income for the tax year in which they are earned—just like employment income. As long as the gain is “unrealized,” meaning the asset remains in your possession, you do not have to pay taxes on it. So, capital gains can be deferred more easily than other passive income sources. The difference is that, unlike employment income, which is fully taxable, only a portion of a capital gain is actually taxed. We will take a closer look at the new rates in a moment.

The second factor that determines the tax paid on a capital gain is your total income for the year. In this sense, you could say capital gains are comparable to regular employment income. As you earn more income, you climb further up Canada’s federal and provincial/territorial tax brackets—also known as marginal tax rates. Your marginal tax rate refers to the rate at which your next dollar earned will be taxed, according to those brackets.

Under Canada’s progressive tax system, individuals are taxed at different rates, whether the income is from capital gains or employment. This means there’s no single “capital gains tax rate” in Canada, because your rate depends on how much you earn that year.

To know how much you’ll owe in capital gains tax, you must figure out your total income for the year, your federal and provincial/territorial tax brackets, and your capital gains inclusion rate.

What is the capital gains inclusion rate?

Previously, Canada had a single capital gains inclusion rate of 50%. This rate applied to individuals, trusts and corporations. This situation changed as of June 25, 2024, when the federal government increased the inclusion rate for individuals—in some cases—as well as for trusts and corporations in all cases. Effective June 25, 2024, the inclusion rate for individuals is one-half (50%) on the first $250,000 of a capital gain, and two-thirds (66.67%) on any portion that exceeds $250,000. The inclusion rate for corporations and trusts is two-thirds (66.67%) on all capital gains.

However that has since changed.

What is the capital gains tax rate in Canada?

For our purposes, we’ll look at the capital gains tax rate for individuals. Just know that different rules apply for trusts and corporations.

Now that we’ve established capital gains tax is based on your marginal tax rate, combined with an inclusion rate of either 50% or 66.67%, we start to get a picture of how much Canadians pay in capital gains tax. For example, with the combined federal and provincial/territorial tax rates we currently have in Canada, we know that no one pays more than 27.4% tax on capital gains of less than $250,000. That’s around half of what many people assume to be the case! And for gains of more than $250,000, no one pays more than 36.5% tax. Bear in mind, this top tax rate applies only to individuals with an income over $1,103,478 in 2024, who live in Newfoundland and Labrador and who report a capital gain of more than $250,000—in other words, very few Canadians.

You can calculate these numbers yourself. To estimate your capital gains tax rate, multiply your combined federal and provincial/territorial tax rate by the applicable inclusion rate (0.5 or 0.6667).

To get a clearer picture of what our system means for Canadians, see the examples in the table below using 2024 tax rates. They appear in order of least to most capital gains tax owed.

How to calculate capital gains and losses

You can calculate whether you have a capital gain or loss by subtracting the asset’s net cost of acquisition from the net proceeds of its sale. 

As simple as that may sound, there’s a bit more to it. To ensure you follow capital gains tax rules as set out by the Canada Revenue Agency (CRA), you’ll need to know the adjusted cost base (ACB), outlays and expenses, and proceeds of disposition. 

• Proceeds of disposition: The asset’s value at the time of sale. It generally represents the amount earned from the transaction. When calculating a capital gain, you will deduct any outlays and expenses from the proceeds of disposition to determine the net proceeds of the sale. 
• Adjusted cost base (ACB): The amount originally paid for the asset, plus any acquisition costs, such as commissions and legal fees. For example, the ACB of a real estate property can include closing costs like land transfer tax as well as capital expenses. 
• Outlays and expenses: The total of costs of selling, such as commissions, brokers’ fees, legal fees, and advertising costs. 

Once you have those three numbers in hand, you can calculate the capital gain by subtracting the ACB and outlays and expenses from the proceeds of disposition. 

Capital gain or loss  = proceeds of disposition – (ACB + outlays and expenses)

How to avoid or minimize capital gains tax in Canada

There’s no way out of paying taxes, and you could face an interest penalty for failing to pay your taxes or missing a tax deadline. Tax evasion is illegal in Canada, but you have the right to seek paying the least amount of tax possible within the law. It’s no different with capital gains. Here are some ways you can legally reduce the amount of capital gains tax you owe in Canada. 

1. Understand how capital gains are calculated

Any strategy aimed at reducing capital gains tax should begin with understanding the rules outlined above. Knowing which expenses to account for in calculating a capital gain can help reduce the amount, saving you from paying more taxes than necessary. For example, renovations, land transfer taxes and legal fees can reduce the capital gain on real estate. 

2. Hold your investments in a registered account

One of the easiest ways to avoid paying taxes on capital gains is to hold your investments in a registered account, such as a registered retirement savings plan (RRSP), tax-free savings account (TFSA), first home savings accounts (FHSA) or registered education savings plan (RESP). 

Investments held in these accounts are tax-sheltered. That means your investments can grow in value or generate income (such as dividends and compound interest) tax-free or tax deferred. With TFSAs, you can have capital gains and withdraw the funds without paying taxes on them. The same applies for FHSAs as long as withdrawals are used to purchase an eligible home. You or your beneficiary will pay taxes when withdrawing from an RRSP or RESP, but typically at a lower rate than you would if reporting the income on your tax return today. 

If you have available RRSP contribution room, another option is to put the capital gain proceeds into an RRSP, which reduces your taxable income for the year.

3. Claim a capital loss from other investments

You don’t pay any tax on capital losses; in fact, they can help offset the taxes you would otherwise pay on capital gains until the balance of capital gains for the year is reduced to zero. 

You can claim net capital losses for the year to offset gains reported to the CRA during the previous three years, or you can carry those losses into the future—indefinitely—and apply them to capital gains in another year. Note, however, that this applies only to capital gains; you can’t claim a capital loss against employment income or other sources of income. 

People often look to realize capital losses late in the year, once their capital gains for the year are known, a process known as tax-loss harvesting or tax-loss selling. 

4. Claim the principal residence exemption

Residential properties are considered an “asset” and may be subject to capital gains tax. There is one big exception to this rule. It’s called the principal residence exemption. A home that has served as your principal residence is exempt from capital gains tax, as long as it meets the following criteria:  

• You own the home either alone or jointly with another person.
• You designate the property as your principal residence with the CRA. More than that, though, can you show that you actually lived there and did not claim any other property as your principal residence during any of those years? 
• You, your spouse, your common-law partner or your kids inhabited the home in each year for which the exemption is claimed.
• You haven’t claimed any other property as your principal residence during any of the years in which the exemption is claimed. You can only have one principal residence in a given year, and it does not have to be the property you occupied most frequently (so, a cottage can qualify).

5. Donate your assets to charity

You may also choose to donate securities, such as stocks and bonds, by transferring ownership to a registered charity. Taxes on capital gains do not apply to capital transfers to charitable organizations. This allows you to give more than you would with cash—selling the asset first would result in taxes owed—and still receive a charitable tax receipt for the amount donated.

Tax on capital gains in Canada

The tax owed on capital gains is often less than Canadians believe. No, you do not lose 50% of a capital gain in taxes. In reality, only half or two-thirds of a realized gain is taxed, and your marginal tax rate determines your tax bill. 

This means the amount you end up paying in tax will depend on how much your asset has grown in value, as well as your other sources of income. And between tax-sheltered investment accounts, the principal residence exemption and the rules around capital losses, there are many legitimate ways to ensure you don’t pay more tax than necessary in any given year.

Read more about taxes:

• How capital gains works on the sale of a property
• Do you pay capital gains tax when separating or divorcing?
• Would a senior get a tax credit for selling their house if they move out?
• What are the tax benefits of donating to charity?

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