What is capial gains tax in Canada?
What is capital gains tax in Canada and when do you need to pay it? A capital gain occurs when you sell an investment, such as property or stocks, for more than it intially cost to purchase. This profit is then taxed which is known as the capital gains tax. This tax is to be paid when the capital gain is realized, which means when the investment is sold.
If the investment has not been sold, the capital gain is known to be unrealized. But what if the sale would result in a loss? This would be considered a capital loss, which would happen if the value of your investment had decreased. Capital losses can be used to offset other capital gains and reduce taxes. The CRA allows you to carry forward a capital loss indefinitely or back three years.
What is the capital gains tax rate in Canada for 2025?
The capital gains tax that you pay in Canada is based on you marginal tax rate. The capital gains inclusion rate charged by the CRA is 50%.
There was a proposed change in the capital gains inclusion rate from 50% to two-thirds for those with capital gains of $250,000 or more in a year. This change was set to be effective as of January 1, 2026. On March 21, 2025 the Government of Canada announced that this proposed hike in the capital gains inclusion rate was cancelled.
Capital gains tax exemption on primary residence
If the property you are selling is your primary residence then it is exempt from capital gains taxes. This allows you to sell your primary residence without paying tax on any proceeds which can then be used to purchase another residence. However, in order to qualify for the principal residency exemption you need to meet the criteria outlined by the CRA.
How to reduce or avoid capital gains tax
Although you may not be able to fully avoid paying capital gains tax, there are many strategies that you can use to help reduce the total amount of capital gains tax that you will have to pay. This involves using capital losses to offset your capital gains, this will reduce your total capital gains amount and the tax you will have to pay. Another option would be taking advantage of tax shelters such as Registered Retirement Savings Plan (RRSP), Tax-Free Savings Account (TFSA) or Registered Education Savings Plan (RESP). You can also engage in tax-loss harvesting which is when you look to create capital losses by selling poor performing investments.
Capital Gains Tax Calculation
The formula for calculating your total capital gain or loss is as follows:
- Proceeds of Disposition - Adjusted Cost Base = Total Capital Gain
- Total Capital Gain X Inclusion Rate = Taxable Capital Gain
- Taxable Capital Gain X Marginal Income Tax Rate = Capital Gain Tax
Proceeds of Disposition
This is the amount that you receive when you sell your capital property. You are allowed to deduct the expenses that you incurred when selling your capital property.
Adjusted Cost Base
Your adjusted cost base is the amount that you purchased the property for as well as expenses incurred to acquire the property. Any capital expenditures that you made on the property can also be included in the adjusted cost base (ACB). Capital expenditures are those that improve the useful life of the asset.