A capital gain happens when you sell (or are considered to have sold) a capital asset for more than what it cost you, plus selling costs.
Common capital assets include:
- Non‑registered investments (stocks, ETFs, mutual funds, bonds)
- Rental properties and cottages
- Shares in a private corporation
- Certain business assets (goodwill, trademarks, etc.)
If you sell for less than it cost you, you have a capital loss.
Your principal residence is a special case: in many situations, you can claim the principal residence exemption so that the gain is not taxable.
How much tax do you pay on capital gains?
For individuals, you are not taxed on the full gain.
- Right now, generally 50% of your net capital gain is included in your income (the “inclusion rate”).
- That taxable amount is reported on line 12700 of your tax return and taxed at your marginal tax rate alongside your other income.
Example (simplified):
- You buy an investment for 20,000 and later sell it for 30,000.
- Capital gain = 10,000.
- Taxable capital gain (50%) = 5,000.
- That extra 5,000 is added to your income and taxed at your marginal rate.
There has been a lot of talk about increasing the inclusion rate for larger gains (above 250,000) and for corporations and trusts. The most recent proposal to increase the inclusion rate from 50% to 66% by Justin’s Trudo’s government was dumped by Carney’s government. As of now the core idea you should work with is:
- Capital gains are still taxed more favourably than regular income.
- Rule changes tend to hit large, one‑time gains hardest (e.g., big real estate or business sales).
If you’re sitting on a large unrealized gain, this is an area where planning really matters.
What about capital losses?
Capital losses can be very valuable, but only if you use them correctly.
Key rules:
- A capital loss can normally only be used against capital gains (not salary or business income).
- In the year you realize a loss, it first offsets capital gains of the same year.
- If you still have unused net capital losses, you can:
- Carry them back 3 years to offset past gains, or
- Carry them forward indefinitely to offset future capital gains.
Example:
- You had a big capital gain in 2023.
- In 2025, you realize a capital loss.
- You may be able to carry the 2025 loss back to 2023 and recover some tax you already paid.
On your tax return, prior‑year losses are claimed as a deduction on line 25300.
What actually counts as “capital property”?
The tax rules don’t give a simple everyday definition; instead, they focus on whether your profit is:
- On capital account (capital gain), or
- On income account (business/professional income)
This is a big deal because business income is 100% taxable, but capital gains are only taxable at the inclusion rate.
Some general guidelines (there are exceptions):
- Long‑term investments, rentals, cottages, and most personal use real estate are usually capital assets.
- Assets you buy with the primary intention of reselling quickly for profit may be considered inventory, and profits can be fully taxed as business income.
- CRA and the courts look at your intention and your behaviour: how often you trade, how long you hold assets, your experience, and how the activity fits with your work or business.
If you’re actively “flipping” properties or trading like a business, don’t assume everything is a capital gain.
Special capital gains rules and opportunities
There are a few key planning opportunities most people should know about.
1. Lifetime Capital Gains Exemption (LCGE)
The LCGE lets you shelter a large amount of capital gains from tax when you sell certain assets.
As of the latest changes:
- The LCGE is 1.25 million of eligible capital gains.
- It generally applies to:
- Qualified Small Business Corporation (QSBC) shares
- Qualified farm or fishing property
This means that, with proper planning, you can sell a qualifying business and pay little or no tax on a large portion of the gain.
2. Corporations and trusts
Capital gains inside a corporation or trust are taxed differently and often at higher combined rates than for individuals, especially if the government decides to increase the inclusion rate in the future for these entities as they had recently planned to do.
But corporations can also give you planning tools (e.g., lifetime capital gains exemption access, holding companies, capital dividend accounts). This is very fact‑specific and worth professional advice.
Why capital gains planning matters if you own assets
If you own any of the following, capital gains planning should be on your radar:
- Non‑registered investments
- Rental or vacation property
- A business you may want to sell one day
- Shares in a private corporation
- A portfolio with both winners and losers
Done well, planning can help you:
- Spread gains over multiple years to avoid crossing higher brackets or future inclusion‑rate changes.
- Use capital losses strategically to reduce past or future tax.
- Maximize the LCGE when selling a qualifying business.
- Reduce tax at death, when you’re often deemed to dispose of many assets at fair market value.
Done poorly—or not at all—you can easily pay tens or hundreds of thousands more in tax than necessary over your lifetime.
What you should do next
If you’re not a tax professional, you don’t need to memorize section numbers. You do need to know whether capital gains are a big lever in your financial life.
Here’s a simple checklist:
- Do you own a rental, cottage, or other property that is not your principal residence?
- Do you hold non‑registered investments with significant unrealized gains?
- Do you own shares of a private corporation or plan to sell your business?
- Do you have old capital losses you’ve never really used?
- Are you concerned about possible future increases in the capital gains inclusion rate?
If you answered yes to any of these, you should have a specific capital gains strategy—not just “sell when I feel like it.”
Your next step: don’t guess your way through capital gains
As a CPA, I see two common extremes:
- People who panic about capital gains and avoid every sale (even when it makes investment or life sense).
- People who ignore capital gains completely and are shocked by a very large tax bill at sale or at death.
Neither approach is helpful. I’m here to help and I encourage you to book a FREE 15-minute consultation with me here to chat about your situation.
