Capital gains tax in Canada, explained

A capital gain is the profit you make when you sell something for more than you paid. That "something" might be a stock, ETF, mutual fund, rental property, or cottage. What you paid is your adjusted cost baseAdjusted cost base (ACB): what you originally paid for an asset, including commissions and reinvested distributions. Your capital gain is proceeds minus ACB., or ACB — it includes any commissions and reinvested distributions. What you sell for, net of selling costs, is your proceedsProceeds of disposition: what you receive when you sell, net of selling costs like commissions. Subtract your cost base from this to get the gain.. The difference is your capital gain. If you sell for less than your cost base, it's a capital loss instead.

The key point is that a gain on paper isn't taxed. If your investments rise in value but you keep holding them, there's no tax to pay. The gain only becomes "real" for tax when you sell.

Canada does not have a separate capital gains tax rate. Instead, only part of your gain is taxed. That part is called the inclusion rateThe share of a capital gain that's actually added to your taxable income. In Canada it's 50%, so only half the gain is taxed., and it is 50%. So you add half of your gain to your income for the year, then pay tax on that half at your normal rate.

Here's the math on a $10,000 gain if your marginal tax rate is 40%:

• Half of the gain — $5,000 — is included in your income.
• That $5,000 is taxed at 40%, for tax of $2,000.
• Your effective rate on the whole gain is just 20% — half your marginal rate.

Because only half is taxed, capital gains are the most lightly taxed kind of investment income in Canada. That's one reason long-term investors like to hold growth assets in taxable accounts. The calculator above does this math for any numbers you enter.

You may have seen headlines in 2024 about the inclusion rate rising. The federal budget proposed raising it to 66.67%. The higher rate would have hit gains above $250,000 a year for individuals, plus all gains for corporations and most trusts. But that plan was first deferred to 2026, then cancelled outright in 2025.

The result for 2026: the inclusion rate remains 50% for everyone, exactly as it was before the proposal. There is no $250,000 threshold and no higher rate. A couple of related measures did survive — the Lifetime Capital Gains Exemption was raised to $1.25 million — but the core 50% inclusion rate is unchanged.

Capital gains tax is triggered by a dispositionAny event the CRA treats as a sale — selling, gifting, changing an asset's use, leaving Canada, or death. A disposition is what triggers the tax.. The most common one is a sale, but several other events count too:

• Selling a stock, fund, or property for more than its cost base.
• Gifting an asset to someone other than a spouse — the CRA treats it as a sale at fair market value.
• Changing the use of a property, such as turning your home into a rental.
• Leaving Canada — emigrants face a "departure tax," a deemed dispositionWhen the CRA treats you as having sold an asset even though no money changed hands — for example at death or when you emigrate — and taxes the gain as if you had. of most assets.
• Death — your assets are treated as sold at fair market value, though anything left to a spouse can roll over with no tax for now.

Note what's not on the list: holding an investment that has gone up. No matter how large the unrealized gain, there's no tax until you actually dispose of it — which is what gives long-term investors so much control over their tax timing.

Two major exemptions can wipe out capital gains tax entirely:

• The principal residence exemptionMakes the capital gain on the home you live in tax-free for every year it was your principal residence. Limited to one property per family per year.. The gain on the home you live in is tax-free for every year it was your principal residence. The limit is one property per family per year, so a second home like a cottage is taxable. You must still report the sale on your return to claim the exemption.
• The Lifetime Capital Gains Exemption (LCGE)Shelters up to $1.25 million of gains on qualified small-business shares, farm, or fishing property over your lifetime.. Gains on qualified small-business shares, farms, and fishing property are exempt up to a lifetime limit of $1.25 million. That's a big break for owners selling their company or land.

Beyond the exemptions, several everyday strategies keep the bill down:

• Use registered accounts. Gains inside a TFSA, RRSP, or FHSA are never taxed. Holding growth investments there is the simplest avoidance of all.
• Offset gains with losses. Capital losses cancel capital gains dollar-for-dollar. Unused losses carry back three years or forward indefinitely — a practice known as tax-loss harvestingDeliberately selling losing investments to realize capital losses that offset your capital gains, lowering the tax. Losses carry back 3 years or forward indefinitely..
• Mind the superficial loss ruleDenies your capital loss if you buy the same security back within 30 days before or after the sale. The loss is added to the cost base of the repurchase instead.. If you sell at a loss and buy the same security back within 30 days (before or after), the loss is denied. Wait out the window or buy something similar but not identical.
• Donate securities in-kind. Gifting appreciated stocks or funds directly to a registered charity eliminates the capital gain entirely and earns a donation tax credit.
• Time the sale. Sell in a year when your income is low — say, early retirement or a gap year — and the taxable half is taxed at a lower rate. This pairs well with a tax-efficient withdrawal order.

Not all investment income is taxed the same way, and the differences drive where you should hold each type:

• Interest (from bonds, GICs, savings) is fully taxable at your marginal rate — the least efficient income.
• Eligible Canadian dividends get a gross-upEligible Canadian dividends are "grossed up" (increased) on your return, then a dividend tax credit offsets the extra — a mechanism that accounts for tax the company already paid. and a tax credit. That's friendly at lower incomes, but less so as your income rises.
• Capital gains are only 50% taxable, making them the most efficient at most income levels.

The takeaway: hold interest-paying investments inside registered accounts, where the tax disappears. Growth investments, which create capital gains, can sit in taxable accounts. This is the heart of tax-efficient investing, and it works hand-in-hand with keeping your fees low.

Capital gains and losses go on Schedule 3 of your personal tax return. Your broker usually issues a T5008 slip listing your sales, and gains passed on by funds show up on T3 or T5 slips. Even so, it's on you to track your adjusted cost base. That matters most if you hold the same investment in several accounts, or have reinvested distributions over the years.

Keep your purchase and sale records, including commissions, so you can prove your cost base. Good ACB tracking is the difference between paying tax on your real gain and overpaying by mistake.

This guide and calculator are for educational purposes only and are not financial or tax advice. The calculator uses a simplified model: it applies the 50% inclusion rate to a single gain and taxes the taxable half at the flat marginal rate you enter. It does not account for capital losses, provincial surtaxes, alternative minimum tax, the principal residence exemption, the LCGE, or how a large gain can push you into a higher bracket. Figures reflect 2026 rules. Confirm the current rules and your own situation with the CRA or a qualified tax professional before acting. See our tax-efficient withdrawal order guide for related planning.