The 2024 federal budget changed capital gains taxation for the first time in decades. If you sold investments, real estate, or any property in 2025 or 2026, here is exactly what you owe and how to reduce your tax bill legally.
A capital gain arises when you sell a capital property for more than you paid for it. The most common examples for Canadians: selling stocks, ETFs, or mutual funds held in a non-registered account; selling a secondary property (cottage, rental property, investment real estate); selling a business or business shares; and selling cryptocurrency.
Canada taxes only a portion of capital gains — called the inclusion rate. For 2025 and 2026, the inclusion rate is 50% for all Canadians, regardless of how large the gain is. This means only half of your capital gain is added to your taxable income for the year.
A note on the 2024 proposal: The federal government's April 2024 budget proposed raising the inclusion rate to 66.67% on gains above $250,000 per year. This proposal was deferred in January 2025, then formally cancelled on March 21, 2025. The 50% inclusion rate remains in effect for all capital gains in 2025 and 2026, with no threshold or two-tier system. Any content you see online referring to a 66.67% rate is outdated and does not reflect current Canadian tax law.
Your capital gain is the difference between your proceeds of disposition (what you received from the sale) and your Adjusted Cost Base (ACB) plus any selling costs. The ACB is what you originally paid for the property including all acquisition costs — commissions, legal fees, currency conversion costs, and any capital improvements for real estate.
For publicly traded securities, the ACB uses the average cost method. If you bought 100 shares of a stock at $20 each and later bought another 100 shares at $30 each, your average ACB is $25 per share. When you sell 50 shares at $40, your capital gain is: $40 × 50 shares (proceeds $2,000) minus $25 × 50 shares (ACB $1,250) = $750 capital gain. The taxable capital gain is 50% of $750 = $375, added to your income.
For real estate, the ACB includes the original purchase price, legal fees, land transfer taxes paid on acquisition, and capital improvements (a new roof, an addition, kitchen renovation). It does not include maintenance and repairs. Keeping accurate records of all capital improvements from the day you purchase a property is essential — these records directly reduce your capital gain decades later when you sell.
Currency conversion matters for US and international investments. If you bought US stocks when CAD/USD was 0.75 and sold when it was 0.72, both the original cost and the sale proceeds must be converted to Canadian dollars using the exchange rate at each transaction date. CRA provides annual average exchange rates and specific daily rates through the Bank of Canada for this purpose.
The Principal Residence Exemption (PRE) allows Canadians to shelter all capital gains on their home from income tax — potentially hundreds of thousands or millions of dollars completely tax-free. A property qualifies as your principal residence for a year if you, your spouse, common-law partner, or children ordinarily inhabit it during the year.
A family unit can only designate one property per year as a principal residence. You must designate the property on your T1 return using Form T2091 in the year of sale — even if the gain is fully exempt. Missing this form can result in the CRA denying the exemption entirely.
The formula for the exempt portion is: (1 + number of years designated as principal residence) ÷ total years owned × capital gain. The +1 in the formula allows for the overlap year when you sell one home and buy another, meaning both properties can be designated for the transition year without losing a year of exemption on either.
The Lifetime Capital Gains Exemption is one of the most powerful tax incentives available to Canadian entrepreneurs and farmers. It allows qualifying individuals to shelter up to $1,250,000 in capital gains from selling qualifying small business corporation shares or qualifying farm and fishing property — completely tax-free over their lifetime.
For the LCGE to apply to small business shares, the corporation must be a Canadian-Controlled Private Corporation (CCPC), at least 90% of the fair market value of the assets must be used in an active business carried on primarily in Canada at the time of sale, and the shareholder must have owned the shares for at least 24 months prior to sale with no more than 50% of assets being passive investments throughout that period.
Planning for LCGE eligibility should begin years before an intended sale. Common issues that disqualify shares: excess cash or passive investments in the corporation (the "passive asset" test), shares held for less than 24 months, and technical ownership requirements not met by all shareholders. A business lawyer and tax accountant should review LCGE eligibility well before any sale process begins — ideally 2 to 3 years in advance to allow time to restructure if needed.
Spouses and other family members who are shareholders may each claim their own LCGE on a qualifying sale. A family-owned business sold for $2,500,000 with two shareholders (spouses) each owning 50% can result in both claiming $1,250,000 LCGE — sheltering the entire $2,500,000 gain from tax. This income-splitting through family share ownership is a significant reason many Canadian business owners involve family members as shareholders from an early stage.
Tax-loss harvesting is the deliberate realisation of capital losses in your non-registered account to offset capital gains in the same or nearby tax years. When an investment has declined below your ACB, selling crystallises the capital loss. This loss can be applied against: capital gains in the same calendar year (most powerful use), capital gains in the 3 preceding years via a T1A amended return (recovering taxes already paid), or carried forward indefinitely to offset future capital gains.
The superficial loss rule is the critical constraint: if you sell an investment at a loss and repurchase the identical security within 30 calendar days before or after the sale, the loss is denied and added to the ACB of the repurchased security. To harvest the loss legitimately, either wait 30 days before rebuying, or immediately purchase a similar-but-not-identical replacement security to maintain market exposure during the 30-day window.
Example: You hold XIU (iShares S&P/TSX 60 ETF) with a $12,000 capital loss. You sell XIU and immediately buy XIC (iShares Core S&P/TSX Capped Composite ETF) — both are Canadian equity ETFs tracking different but correlated indexes, so they are not identical securities. You crystallise the $12,000 loss for tax purposes while maintaining essentially equivalent Canadian equity exposure. After 30 days, you can repurchase XIU if preferred. The $12,000 capital loss offsets $12,000 in other capital gains, saving approximately $2,760 in tax at a 46% combined marginal rate (50% inclusion × 46% = 23% effective rate on capital gains).
The CRA treats cryptocurrency as a commodity, not currency. Every taxable cryptocurrency event must be reported: selling crypto for Canadian or US dollars; trading one cryptocurrency for another (a simultaneous disposition and acquisition — both events are taxable); using cryptocurrency to purchase goods or services (deemed disposition at fair market value on the date of the transaction); and receiving cryptocurrency as payment for services (business or employment income, not capital gains).
Calculating ACB for cryptocurrency is significantly more complex than for exchange-traded securities. Each acquisition at a different price changes the average ACB. Forks, airdrops, staking rewards, and DeFi yield each have specific CRA tax treatment that has evolved through technical interpretations. Dedicated cryptocurrency tax software such as Koinly, CoinTracker, or TokenTax integrates with Canadian exchanges and wallets to calculate accurate ACB and capital gains across all transactions.
The CRA has obtained court orders requiring major Canadian cryptocurrency exchanges to disclose complete customer transaction data. Unreported cryptocurrency gains are not a grey area — they are taxable income that the CRA is actively pursuing. If you have unreported gains from prior years, the Voluntary Disclosures Program (VDP) allows you to come forward proactively for reduced penalties before the CRA initiates contact. The earlier you act, the more penalty relief is available under the program.
Capital gains are reported on Schedule 3 of your T1 personal income tax return, which feeds into line 12700 of the return. The Schedule 3 requires you to list each disposition separately for publicly traded securities and real estate, with the date of acquisition, proceeds, ACB, and resulting gain or loss for each. Financial institutions issue T5008 slips showing your securities transactions — these automatically appear in CRA My Account and must match your Schedule 3 reporting.
For real estate sales, no T-slip is issued. You must self-report the gain on Schedule 3. If you are claiming the Principal Residence Exemption for all or part of the gain, you must also complete Form T2091 (designation of principal residence) and file it with your return. The CRA made reporting of principal residence sales mandatory in 2016 — the disposition must be reported even if the gain is fully exempt.
Capital losses that exceed capital gains in the current year create a net capital loss that can be carried back 3 years or carried forward indefinitely. Use Form T1A to request a carryback to prior years. Capital losses cannot be applied against other types of income — only against capital gains. This is an important limitation: a significant capital loss from a failed investment cannot reduce your employment income, RRSP withdrawals, or rental income.
The deadline to realise a capital loss that you want to apply to the current tax year is December 31. Trades in Canada settle on a T+1 basis in 2026 — meaning shares must be sold by December 31 for the loss to be recognised in that tax year. Do not wait until the last day of the year; execute any planned loss harvesting by December 27 or 28 to avoid any settlement timing issues.
If you receive a T5008 slip showing a proceeds amount that you believe is incorrect, contact your financial institution before filing. T5008 slips show the gross proceeds of disposition but do not always include the ACB — you must track your own ACB and calculate the actual gain or loss. Tax software that imports T5008 data will prefill the proceeds but may leave the ACB blank, requiring you to enter it manually from your own records. Failing to enter the ACB results in the entire proceeds amount being treated as a gain, significantly overstating your tax owing.
Q: What is the capital gains inclusion rate in Canada for 2026?
A: The capital gains inclusion rate is 50% for all Canadians in 2025 and 2026. The proposed increase to 66.67% on gains above $250,000 was formally cancelled by the federal government on March 21, 2025 — after being proposed in the April 2024 federal budget and briefly deferred in January 2025. There is no two-tier system and no threshold — 50% of every capital gain is included in taxable income regardless of the size of the gain. If you see content online referring to a 66.67% rate, it is outdated and does not reflect current Canadian law.
Q: Do I pay capital gains tax on my home in Canada?
A: Generally no — your principal residence is exempt from capital gains tax under the Principal Residence Exemption. You must designate the property as your principal residence on Form T2091 when you sell, and report the sale on your tax return even if the full gain is exempt. The exemption applies to one property per family per year. A second property (cottage, investment property) does not qualify unless you designate it as your principal residence for specific years.
Q: How much is the Lifetime Capital Gains Exemption in 2026?
A: The Lifetime Capital Gains Exemption is $1,250,000 for qualifying small business corporation shares and qualifying farm and fishing property in 2026. This means up to $1,250,000 in capital gains from selling these qualifying assets can be claimed tax-free over your lifetime. Each eligible individual has their own separate LCGE — meaning a married couple who are both shareholders of a qualifying corporation can each claim up to $1,250,000 on a qualifying sale.