Tax and accounting terms
Capital Gains Tax in Canada: How Gains Are Calculated and Taxed
One halfof a capital gain is included in income and taxed at your marginal rate. The other half is not taxed.
Sources checked October 20263 min read
Key points
- A capital gain is the sale price less the adjusted cost base and the costs of selling
- Half the gain is taxable, at the seller's marginal rate
- Capital losses reduce only capital gains, three years back or any year forward
- A principal residence, qualifying small business shares and donated listed securities can be sheltered
How a capital gain is calculated
A capital gain arises when you sell, or are treated as selling, capital property for more than its adjusted cost base plus the outlays and expenses of selling it. Capital property includes shares, fund units, a cottage, a rental property and land held as an investment. You are also treated as selling when you give property away, change how you use it, leave Canada, or die.
Only the taxable capital gain, 50% of the gain, is added to income and taxed at your marginal rate. The sale is reported on Schedule 3 for the calendar year it happens, even when a business has a different year end, and a return has to be filed to report it even if no tax is owing.
| Step | Amount |
|---|---|
| Proceeds of disposition | $300,000 |
| Less adjusted cost base | $200,000 |
| Less legal fees and commission on the sale | $15,000 |
| Capital gain | $85,000 |
| Taxable capital gain, at one half | $42,500 |
Using capital losses
A capital loss reduces capital gains only. Half of it, the allowable capital loss, is applied first against taxable capital gains of the same year, and what is left becomes a net capital loss that can be carried back to any of the three previous years or forward to any future year. It cannot reduce salary, business or interest income, except as an allowable business investment loss on certain small business shares or debt.
A loss on personal use property, such as a car, a boat or furniture, is generally not deductible at all, though a gain on it is taxable, and each item is treated as costing and selling for at least $1,000. A loss on property bought back within 30 days can be denied as a superficial loss, which the adjusted cost base guide covers.
Spreading the gain with a reserve
When part of the price is paid in later years, you can usually claim a reserve on Form T2017 and report the gain as the money comes in. Most reserves run for at most four years after the sale, so the whole gain is included in income within five years. A transfer of qualified small business corporation shares or family farm or fishing property to your child can be spread over ten. A reserve is not available on a sale to a corporation you control, or while you are not resident in Canada.
When a gain is not taxed, or not a capital gain
Several rules take a gain out of tax, or out of capital treatment altogether.
- A home designated as your principal residence for every year you owned it is fully sheltered. The sale still has to be reported on Schedule 3 and Form T2091, or the exemption can be refused.
- Selling shares of a qualified small business corporation, or qualified farm or fishing property, can qualify for the capital gains deduction, often called the lifetime capital gains exemption.
- Donating publicly listed securities to a registered charity or other qualified donee carries an inclusion rate of zero, so the gain is not taxed.
- A home or rental unit in Canada sold after less than 365 consecutive days is flipped property: the profit is fully taxable business income, unless the sale follows one of the life events the CRA lists, such as a death in the family, a separation, a job loss or a move for work.
Quick answers
How much tax do I pay on a capital gain in Canada?
Half the gain is added to your income and taxed at your marginal rate, so the gain is effectively taxed at half your marginal rate.
Can capital losses reduce my salary or business income?
No. Net capital losses reduce only taxable capital gains, in the three previous years or any future year. An allowable business investment loss is the main exception.
Do I have to report the sale of my home?
Yes. The sale of a principal residence has to be reported on Schedule 3 and Form T2091, even when no tax is owing, or the CRA can refuse the exemption.
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Important. This article provides general educational information, not legal or tax advice for a specific business. Rules, administrative policies, rates and deadlines can change. Confirm your facts and current obligations with the responsible government agency and a qualified adviser.