The Federal Budget in 2024 proposed increasing the Capital Gains inclusion rate to 66.67% for individuals with more than $250,000 in annual capital gains, as well as for corporations and most trusts. The effective date of the change was June 25, 2024. The effective date was recently pushed back to January 1, 2026.
Update (March 23, 2025): Canada will cancel a proposed tax increase in the capital gains inclusion rate, bringing an end to a tax measure that had been widely criticized by industry. The federal government will also keep the increase in the lifetime capital gains exemption limit to C$1.25 million on sale of small business shares and farming and fishing property.
What are capital gains?
A capital gain (or loss) is the difference between what you paid for an asset and what you sell it for. You only realize a capital gain when you sell.
Investments like stocks and real estate are common sources of capital gains because their value tends to increase over time. If you sell an asset for more than its original cost, you’ve made a capital gain — and in Canada, a portion of that gain is taxable.
If the sale price is lower than what you originally paid, you have a capital loss, which can offset taxable gains.
How does capital gains tax work in Canada?
Currently, 50% of a capital gain is included as taxable income. This is known as the inclusion rate. Only half of your capital gain is subject to tax, while the other half is tax-free.
For example, if you make a $10,000 profit on an investment, only $5,000 is added to your taxable income for that year. The amount of tax you owe depends on your personal tax bracket.
What about capital gains on selling a business?
To qualify for the lifetime capital gains exemption (LCGE), certain criteria must be met. If you own shares in a qualifying small business corporation, you may be eligible to shelter up to $1.25 million in capital gains from tax when selling those shares. This exemption also applies to certain farm and fishing properties.
The business must meet specific conditions, including being an active Canadian-controlled private corporation (CCPC) for at least 24 months prior to the sale. Additionally, at least 50% of the company's assets must have been actively used in business operations during that period.
Keep in mind that the LCGE is a lifetime limit — if you’ve claimed part of it before, your remaining exemption will be reduced accordingly.
How do you calculate capital gains or losses?
To determine your capital gain or loss, subtract the adjusted cost base (ACB) — what you originally paid, plus related costs like commissions and legal fees—from the amount you sold the asset for.
If you sell at a profit, 50% of the gain is taxable. If you sell at a loss, you can use 50% of the loss to offset other taxable capital gains, either in the current year or carried forward up to 20 years or backward up to 3 years.
Do you pay capital gains tax on your home?
If the property is your primary residence, the principal residence exemption may apply, meaning the capital gain is tax-free. If you sold your principal residence, you must still report the sale on your tax return to claim this exemption. Further, if you owned the property for less than 12 months, you may not qualify for the Principal Residence Exemption.
If you’re selling a rental property, vacation home or investment property, the capital gain is taxable at the standard inclusion rate. Talk to your accountant if you rented the property for a period, and also had the same property as your principal residence.
Learn more about rental properties and rental property tax on our blog.
While the capital gains tax system in Canada hasn’t changed yet, it has been a major topic of discussion. For now, the inclusion rate remains at 50%.
If you're planning to sell an asset with significant gains, it’s always a good idea to consult with an accountant to understand how the rules apply to your situation.
Did you find this blog helpful? Read more about Personal Tax topics that may be relevant to you and your small business.
