How Capital Gains Are Taxed in Canada
If you sell an investment, a rental property, or a business asset for more than you paid for it, the profit is a capital gain — and Canada taxes it differently than salary or interest income. Understanding the mechanics matters because the rules touch everything from a stock sale in a non-registered account to selling a cottage, and getting the reporting wrong can trigger a CRA reassessment years later.
What counts as a capital gain
A capital gain arises when you dispose of a capital property — shares, mutual funds, ETFs, real estate that isn't your principal residence, or business assets — for more than its adjusted cost base (ACB) plus any costs of selling it, like brokerage fees or legal fees.
The ACB is generally what you paid for the asset, including commissions, plus any capital improvements over time (relevant for real estate). If you bought the same stock at different prices over several purchases, the ACB is usually the average cost across all the shares you hold, not the price of the specific shares you happen to sell.
Selling isn't the only way to trigger a gain. A 'deemed disposition' happens when you gift an asset, when you leave Canada permanently (emigration), or when you die — in each case, the CRA treats you as if you sold the asset at fair market value on that date, even though no cash changed hands.
Keep reading: CAGR Calculator · TFSA Growth Calculator. For the official rules, see Canada Revenue Agency (CRA).
The inclusion rate: only half is taxed
Canada does not tax the full capital gain. Only a portion of it — called the inclusion rate — is added to your income and taxed at your marginal rate. The long-standing inclusion rate is 50%, meaning if you realize a $10,000 gain, $5,000 gets added to your taxable income for the year.
That taxable portion is stacked on top of your other income (employment, self-employment, rental, etc.) and taxed at whatever marginal bracket it lands in federally and provincially — so a large gain can push some of your income into a higher bracket.
Worth knowing: in 2024 the federal government proposed raising the inclusion rate to two-thirds on gains above a threshold, but that increase was cancelled before taking effect, and the inclusion rate remains 50%. Tax rules like this can change with a federal budget, so always confirm the current inclusion rate and brackets on the CRA website before making a decision based on a specific number.
Where the tax bill doesn't apply — or is deferred
Capital gains inside a TFSA are not taxed at all, on the way in, while invested, or on withdrawal — which is why a TFSA is often the first place to hold higher-growth investments.
Capital gains inside an RRSP or FHSA aren't taxed as capital gains at any point either — but they're not tax-free forever. When you eventually withdraw from an RRSP (or an FHSA used for something other than a qualifying home purchase), the full withdrawal is taxed as regular income, regardless of how much of it was originally growth.
- Selling your principal residence: the gain is generally tax-free under the principal residence exemption, as long as the property was your principal residence for every year you owned it. You still need to report the sale on your tax return, even when no tax is owing.
- Capital losses: if you sell an investment for less than its ACB, you get a capital loss, which can offset capital gains realized in the same year, carried back up to three prior years, or carried forward indefinitely against future gains.
- The superficial loss rule: if you sell an investment at a loss and buy the same or an identical property within 30 days before or after, the CRA typically denies the loss and adds it back to the ACB of the replacement shares instead.
Reporting it correctly
You report capital gains and losses on Schedule 3 of your personal tax return, and your brokerage will typically issue a T5008 slip summarizing dispositions during the year — but the CRA holds you responsible for accurate ACB tracking, not the slip issuer.
Keeping your own running record of purchase dates, prices, reinvested distributions, and any reinvested dividends (for a dividend reinvestment plan) is the single most useful habit here, since ACB errors compound over years of buying and selling the same holding.
If you own qualified small business corporation shares or qualified farm or fishing property, a separate lifetime capital gains exemption may shelter part of the gain from tax entirely — the rules and the exempt amount are specific and adjusted periodically, so confirm your eligibility and the current limit directly with the CRA or a tax professional before relying on it.
Frequently asked
Do I pay capital gains tax inside my TFSA or RRSP?
No, not directly. Inside a TFSA, gains are never taxed. Inside an RRSP or FHSA, gains grow tax-deferred and are only taxed as ordinary income when you eventually withdraw the money, not as a capital gain.
Is selling my house tax-free in Canada?
If the property was your principal residence for every year you owned it, the gain is generally exempt from tax under the principal residence exemption — but you still must report the sale on your tax return, even when the exemption eliminates the tax owing.
What happens if I sell an investment at a loss?
A capital loss can be used to offset capital gains you realized in the same tax year. If you have more losses than gains, you can carry the unused loss back up to three years or forward indefinitely to offset future gains.
Sources
General information for Canadian readers, not individualized financial, tax or investment advice. Figures reflect the date reviewed; confirm current limits and rules with the CRA or a qualified professional before acting.