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Learn how capital gains are taxed and how to avoid paying more taxes than necessary when selling your assets.
Selling high-performing stocks or a cottage property can reap significant profits, and those moments are worth celebrating. But while you’re enjoying the spoils of your investments, keep in mind that you’ll eventually have to pay tax on them. In Canada, most gains on capital assets are taxed. Let’s look at how capital gains tax works in Canada and strategies to avoid paying more taxes than you need to come tax time.
When you sell an asset or investment for more than you bought it, you have a capital gain. Let’s say you purchased $1,000 worth of stock and then sold your shares for $1,500 two years later. In this case, you have a capital gain of $500. On the other hand, when your assets depreciate in value and you sell them for less than you bought, you have a capital loss.
Capital gains and losses can occur with many types of investments and property, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), rental properties, cottages and business assets. Capital gains and losses generally do not apply to personal-use property where the value generally decreases over time, such as cars and boats. There may be exceptions for personal-use property like rare coins or collector cars. Capital gains tax does not apply to real estate that qualifies as your principal residence for all years you owned it.
Capital gains are often considered a form of “passive income.” However, they’re taxed differently than other passive income sources, such as interest income, Canadian dividends and foreign dividends. They’re also taxed differently than employment income, due to what’s known as the capital gains inclusion rate. In this sense, capital gains are unique.
The first thing to know is that capital gains are added to your income for the tax year in which they are earned—just like employment income. As long as the gain is “unrealized,” meaning the asset remains in your possession, you do not have to pay taxes on it. So, capital gains can be deferred more easily than other passive income sources. The difference is that, unlike employment income, which is fully taxable, only a portion of a capital gain is actually taxed. As of June 25, 2024, the federal government changed Canada’s capital gains inclusion rates. We will take a closer look at the new rates in a moment.
The second factor that determines the tax paid on a capital gain is your total income for the year. In this sense, you could say capital gains are comparable to regular employment income. As you earn more income, you climb further up Canada’s federal and provincial/territorial tax brackets—also known as marginal tax rates. Your marginal tax rate refers to the rate at which your next dollar earned will be taxed, according to those brackets.
Under Canada’s progressive tax system, individuals are taxed at different rates, whether the income is from capital gains or employment. This means there’s no single “capital gains tax rate” in Canada, because your rate depends on how much you earn that year.
To know how much you’ll owe in capital gains tax, you must figure out your total income for the year, your federal and provincial/territorial tax brackets, and your capital gains inclusion rate.
Previously, Canada had a single capital gains inclusion rate of 50%. This rate applied to individuals, trusts and corporations. This situation changed as of June 25, 2024, when the federal government increased the inclusion rate for individuals—in some cases—as well as for trusts and corporations in all cases.
Effective June 25, 2024, the inclusion rate for individuals is one-half (50%) on the first $250,000 of a capital gain, and two-thirds (66.67%) on any portion that exceeds $250,000. The inclusion rate for corporations and trusts is two-thirds (66.67%) on all capital gains.
For our purposes, we’ll look at the capital gains tax rate for individuals. Just know that different rules apply for trusts and corporations.
Now that we’ve established capital gains tax is based on your marginal tax rate, combined with an inclusion rate of either 50% or 66.67%, we start to get a picture of how much Canadians pay in capital gains tax. For example, with the combined federal and provincial/territorial tax rates we currently have in Canada, we know that no one pays more than 27.4% tax on capital gains of less than $250,000. That’s around half of what many people assume to be the case! And for gains of more than $250,000, no one pays more than 36.5% tax. Bear in mind, this top tax rate applies only to individuals with an income over $1,103,478 in 2024, who live in Newfoundland and Labrador and who report a capital gain of more than $250,000—in other words, very few Canadians.
You can calculate these numbers yourself. To estimate your capital gains tax rate, multiply your combined federal and provincial/territorial tax rate by the applicable inclusion rate (0.5 or 0.6667).
To get a clearer picture of what our system means for Canadians, see the examples in the table below using 2024 tax rates. They appear in order of least to most capital gains tax owed.
| Province/territory of residence | Annual income (excluding gain) | Value of capital gain | Capital gains tax rate | Tax owed on capital gain |
|---|---|---|---|---|
| Ontario | $60,000 | $1,000 | 14.83% | $148.30 |
| B.C. | $45,000 | $5,000 | 10.03% | $501.50 |
| Newfoundland and Labrador | $100,000 | $100,000 | 20.21% | $20,209 |
| Quebec | $75,000 | $400,000 (after June 25, 2024) | 26.95% | $107,783 |
You can calculate whether you have a capital gain or loss by subtracting the asset’s net cost of acquisition from the net proceeds of its sale.
As simple as that may sound, there’s a bit more to it. To ensure you follow capital gains tax rules as set out by the Canada Revenue Agency (CRA), you’ll need to know the adjusted cost base (ACB), outlays and expenses, and proceeds of disposition.
Once you have those three numbers in hand, you can calculate the capital gain by subtracting the ACB and outlays and expenses from the proceeds of disposition.
Capital gain or loss = proceeds of disposition – (ACB + outlays and expenses)
There’s no way out of paying taxes, and you could face an interest penalty for failing to pay your taxes or missing a tax deadline. Tax evasion is illegal in Canada, but you have the right to seek paying the least amount of tax possible within the law. It’s no different with capital gains. Here are some ways you can legally reduce the amount of capital gains tax you owe in Canada.
Any strategy aimed at reducing capital gains tax should begin with understanding the rules outlined above. Knowing which expenses to account for in calculating a capital gain can help reduce the amount, saving you from paying more taxes than necessary. For example, renovations, land transfer taxes and legal fees can reduce the capital gain on real estate.
One of the easiest ways to avoid paying taxes on capital gains is to hold your investments in a registered account, such as a registered retirement savings plan (RRSP), tax-free savings account (TFSA), first home savings accounts (FHSA) or registered education savings plan (RESP).
Investments held in these accounts are tax-sheltered. That means your investments can grow in value or generate income (such as dividends and compound interest) tax-free or tax deferred. With TFSAs, you can have capital gains and withdraw the funds without paying taxes on them. The same applies for FHSAs as long as withdrawals are used to purchase an eligible home. You or your beneficiary will pay taxes when withdrawing from an RRSP or RESP, but typically at a lower rate than you would if reporting the income on your tax return today.
If you have available RRSP contribution room, another option is to put the capital gain proceeds into an RRSP, which reduces your taxable income for the year.
You don’t pay any tax on capital losses; in fact, they can help offset the taxes you would otherwise pay on capital gains until the balance of capital gains for the year is reduced to zero.
You can claim net capital losses for the year to offset gains reported to the CRA during the previous three years, or you can carry those losses into the future—indefinitely—and apply them to capital gains in another year. Note, however, that this applies only to capital gains; you can’t claim a capital loss against employment income or other sources of income.
People often look to realize capital losses late in the year, once their capital gains for the year are known, a process known as tax-loss harvesting or tax-loss selling.
Residential properties are considered an “asset” and may be subject to capital gains tax. There is one big exception to this rule. It’s called the principal residence exemption. A home that has served as your principal residence is exempt from capital gains tax, as long as it meets the following criteria:
You may also choose to donate securities, such as stocks and bonds, by transferring ownership to a registered charity. Taxes on capital gains do not apply to capital transfers to charitable organizations. This allows you to give more than you would with cash—selling the asset first would result in taxes owed—and still receive a charitable tax receipt for the amount donated.
The tax owed on capital gains is often less than Canadians believe. No, you do not lose 50% of a capital gain in taxes. In reality, only half or two-thirds of a realized gain is taxed, and your marginal tax rate determines your tax bill.
This means the amount you end up paying in tax will depend on how much your asset has grown in value, as well as your other sources of income. And between tax-sheltered investment accounts, the principal residence exemption and the rules around capital losses, there are many legitimate ways to ensure you don’t pay more tax than necessary in any given year.
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Are the rules the same for capital gains from disposition of foreign personal property? If a capital gain is paid in the foreign country (Mexico), is the amount paid considered an expense when calculating the actual net gain? OR can the amount be deducted directly from the Canadian tax payable?
Is there provincial tax payable on capital gains as well?
Thanks.
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
My mother passed away this year, 2023. Her house was paid for. She lived in it for 50 years. Does the estate pay capital gains on the value now?
I have a capital loss from 2001 .. where do I claim it against capital gains in my retirment portfolio ?
if you make 20,000 annually do you pay capital gains tax
If I withdraw the distribution from a mutual fund in my RRSP, how is that taxed? Say I take the $1,000 distribution, is it taxed as a capital gain so only 50% of it will be taxed or is it taxed as regular income? Is it taxed differently when it is coming out of a RRIF? I am 69. Thanks
What if Capital Gains are being used to earn your living? It is the only income you have.
total marginal tax rate not federal 33% as you state but is 44% plus when you live in socialist BC
2024 Taxable Income (1) BC 2024 Marginal Tax Rates 2023 Taxable Income (1) BC 2023 Marginal Tax Rates
Other
Income Capital
Gains Canadian Dividends Other
Income Capital
Gains Canadian Dividends
Eligible Non-Eligible Eligible Non-Eligible
first $47,937 20.06% 10.03% -9.60% 10.43% first $45,654 20.06% 10.03% -9.60% 10.43%
over $47,937 up to $55,867 22.70% 11.35% -5.96% 13.47% over $45,654 up to $53,359 22.70% 11.35% -5.96% 13.47%
over $55,867 up to $95,875 28.20% 14.10% 1.63% 19.80% over $53,359 up to $91,310 28.20% 14.10% 1.63% 19.80%
over $95,875 up to $110,076 31.00% 15.50% 5.49% 23.02% over $91,310 up to $104,835 31.00% 15.50% 5.49% 23.02%
over $110,076 up to $111,733 32.79% 16.40% 7.96% 25.07% over $104,835 up to $106,717 32.79% 16.40% 7.96% 25.07%
over $111,733 up to $133,664 38.29% 19.15% 15.55% 31.40% over $106,717 up to $127,299 38.29% 19.15% 15.55% 31.40%
over $133,664 up to $173,205 40.70% 20.35% 18.88% 34.17% over $127,299 up to $165,430 40.70% 20.35% 18.88% 34.17%
over $173,205 up to $181,232 44.02% 22.01% 23.46% 37.99% over $165,430 up to $172,602 44.02% 22.01% 23.46% 37.99%
over $181,232 up to $246,752 46.12% 23.06% 26.36% 40.41% over $172,602 up to $235,675 46.12% 23.06% 26.36% 40.41%
over $246,752 up to $252,752 49.80% 24.90% 31.44% 44.64% over $235,675 up to $240,716 49.80% 24.90% 31.44% 44.64%
over $252,752 53.50% 26.75% 36.54% 48.89% over $240,716 53.50% 26.75% 36.54% 48.89%
what inclusion rate will be used in future if there is a balance of sale on disposition of a capital assets prior to June 24 2024. ie total capital gain is $3m. Total proceeds $5. payments of $1m will be evenly made commencing in 2024
My siblings and I (4 of us) own a piece of property as joint tenants. We have no plans to sell, and we understand that upon the death of each one of us, the property is not part of their estate as it is simply considered the property of the remaining siblings. I’m assuming that the last sibling remaining, who would be the only person left with a name of the title, would be responsible for 100% of any capital gains owing, and that the others, who have passed away first, wouldn’t have had to calculate any captial gains in their estate taxes. Is this correct?
If you receive a lump sum capital gain of X amount over and above what your life time capital gain allotment is ….can you take some money build a second home as an investment and the money you used to build the second home would not be taxed because you reinvested it.? Then I would Sell my primary residence, move into the newly built home live there for two years as your new primary residence. Sell it and do it again to reduce the X amount and use the profit from the houses to avoid paying tax .
Is this one strategy to reducing the capital gains you would have other-wised of paid on the money it takes to build the second home.
Can this be done ?
I have a property with $500000 gain and it’s owned by my wife and me. Each of us will have to file $250000 Capital Gain Tax when we sell the property. Under new rule, are we still covered by 1st $250000 bracket for 50%? Or the whole $500000 is calculated by new rule?
Justin, nice article! Brings clarity to the subject!
Easily the best info I’ve seen.
Thanks for your posting, Justin.
Although you briefly mention provincial taxes, it’s important to realise when you quote tax rates that provincial rates are extra. Also the provinces, such as Ontario, have a surtax on top as well.
Please explain???
With Canada’s current income tax rates, no one pays more than 27% in capital gains tax.
If you have Capital gains and your marginal rate is 33% then you are paying taxes on your Capital tax portion at 33%
If your capital gain brings your taxable income up to straddle 2 tax brackets,
do you pay 2 different tax rates on the capital gain? Or is the entire capital gain taxed at the highest rate ?
Could you explain the rules pertaining to capital gains on an American LP (such as ET) registered & non-registered accounts.
I’ve heard there are additional withholding taxes on s LP vs regular US stock ?
Thanks
In the article it says that 50% of the first $250,000 of capital gains is taxed but in the example you show 100% of the $1000 capital gain taxed. I’m confused.
There are several important points we need to recognize about the Feds recent capital gains tax increases (June 25, 2024). And the rationale for these tax increases are being promoted on the basis of “generational fairness” (see Trudeau himself making this pitch in his living couch promo video) . The very tax that is being promoted (capital gains tax) is actually a most unfair tax in itself – and no one speaks this fact. The capital gains tax is essentially a tax on inflation – it is not a fair tax because it is not applied to your true capital gain. When computing capital gain, the Feds insist that as your Adjusted Cost Base (ACB) you must use the original $$$ cost figure (+ adjustments) that you paid when you originally acquired the asset – be it a property or even a stock. So what is fair about that? Nothing. Using a $$$ figure from say 20 years ago when you purchased the cottage and subtracting that 20-year old $$$ ACB from the present value selling price – that’s not fair because the calculated capital gain figure has a very large inflation component … making the calculation yet another huge Federal tax rip-off. To get your true capital gain, one should be allowed to adjust your 20-year old ACB for inflation and convert it into present-day $$$ and then do the capital gains calculation. Now that would be fair!!!!
Also, the Feds have introduced the tax increases with a $250K annual limit to falsely lure the public into thinking “Oh, this tax doesn’t apply to me”. But eventually everyone with assets over $250K are going to find that this is a deceptive and untrue claim. The Feds in a very sneaky and underhanded way have also implemented an increase to estate taxes. A some point, tax always has to be paid on unrealized capital gains. When one dies, all your assets are deemed to have been sold and tax must be paid on all unrealized capital gains. If one has a cottage, secondary property, other assets or stocks with unrealized capital gain of more than $250K then the over $250K tax rules are going to kick in for the purposes of estate taxation. So many more people than the Feds are letting on will ultimately be affected by these capital gains tax increases when their estate is settled – fewer $$$ will be left for the beneficiaries.
This is a very interested article.
I know Master Trust investment in property is exempted from capital gain tax, With this new regulation Master Trust is still exempted from capital gain or not ?