Understanding capital gains tax in Canada

Making money from your investments can be a win, but those gains can also impact your tax bill. Understanding how capital gains work and what’s taxable can help you make informed decisions and keep more of your money invested.

Here’s what you need to know about capital gains in Canada.

What is a capital gain?

A capital gain is the profit you make when you sell an asset for more than you originally paid for it, after deducting selling costs. You can calculate your capital gain by taking your adjusted cost base (ACB), which is the amount you’ve invested in an asset, including the purchase price and other costs, and subtracting it from the proceeds of disposition (what you received when you sold it). The amount you’re left with is your capital gain.

Capital gains are only taxable when they’re realized. This means that if your investment goes up, but you keep holding it, the gain is unrealized and not taxed.

There are a few situations where a gain may be triggered even when there isn’t a sale. This is called a deemed disposition, and the most common example occurs when someone passes away. In many cases, their assets are considered sold at fair market value, which can create a capital gain or capital loss. There are some exceptions, such as when assets are transferred to a surviving spouse or common‑law partner, which may allow for a tax‑deferred rollover.

How are capital gains taxed?

In Canada, 50% of a capital gain is taxable and is added to your total taxable income for the year, which is taxed at your marginal tax rate. The capital gains inclusion rate was slated to increase in 2026, but the proposed increase was cancelled in 2025. As a result, the 50% rate remains in place.

Here’s a simple example. If you earned $90,000 from your job and realized a $20,000 gain from selling an exchange-traded fund (ETF), $10,000 of that gain (or 50%) would be added to your income. Your total taxable income for the year would then be $100,000.

How much tax you owe depends on your marginal tax rate, which is based on Canada’s federal and provincial/territorial tax rates. For example, someone in the highest tax bracket in Ontario (earning more than $258,482 in 2026) would pay an effective tax rate of about 27% on their total capital gain. Here’s how that breaks down:

• Capital gain = $20,000
• Amount subject to tax = $10,000
• Top marginal rate in Ontario = 53.5%
• Amount of tax paid on the total gain = 26.8%

It’s important to note that if you trade frequently inside a non-registered or registered account, the Canada Revenue Agency (CRA) may classify your investing activity as day trading and treat any capital gains as business income. This means that 100% of your profits would be taxable instead of 50%.

What assets produce capital gains?

Capital gains tax can apply when you sell a wide range of investments or property. Common assets that can produce capital gains include:

• ETFs
• Mutual funds
• Stocks
• Bonds
• Crypto assets
• Real estate (other than your principal residence)

Some mutual funds or ETFs may distribute taxable capital gains to investors when the fund sells securities inside the portfolio. These gains are taxable if you hold the fund in a non-registered account, and the distribution may be reinvested and increase your ACB.

Real estate is another area where capital gains come into play. If you sell an income property or other secondary property, any increase in value is typically subject to capital gains tax. The exception occurs when you sell your principal residence, assuming you lived in the home for every year you owned it. However, you still need to report the sale of your home to the CRA.

How can capital losses help reduce taxes?

Just as you can realize a capital gain, you can also realize a capital loss, which occurs when you sell an investment for less than your ACB. While capital losses are not ideal, they can be valuable tools for reducing your capital gains tax. It’s important to note that capital losses can’t be used to reduce regular employment or interest income, only capital gains.

Here are some ways you can use capital losses:

• Offset current year capital gains: Capital losses reduce capital gains dollar-for-dollar. For instance, if you realized a $10,000 capital loss, $5,000 (50%) would be considered an allowable capital loss. If you also realized a $10,000 capital gain in the same year, the taxable portion would also be $5,000. Here, your $5,000 loss offsets your $5,000 gain, reducing the tax you would have to pay on that gain to zero.
• Carry losses back three years: If you don’t need all your losses this year, you can carry them back to three previous tax years to offset past gains and potentially receive a refund of taxes already paid.
• Carry forward losses indefinitely: You can save your capital losses for future years if you don’t need them now. This is particularly helpful if you expect a large gain in the future, such as when selling a rental property or long-held investment.

Understanding the superficial loss rule

The CRA has rules in place to prevent investors from selling an investment just to book a loss and then immediately buy it back. This is known as the superficial loss rule. A superficial loss may occur if

• you sell an investment at a loss, and
• you or someone affiliated with you buys the same or an identical investment in any account within 30 days before or after the sale, and
• you still own it at the end of that period

If the CRA considers a loss superficial, it’s denied, meaning it can’t be used to offset capital gains. Instead, the loss added to the ACB of the repurchased investment, effectively deferring the loss until a future sale.

What are strategies to reduce or defer capital gains taxes?

Managing capital gains is an important part of tax planning for any Canadian who buys and sells assets. With the right approach, there are ways to reduce or defer the taxes you may owe. Here are some strategies to consider:

• Use registered accounts: Your investments are sheltered from capital gains taxes inside registered accounts. Depending on the account you use, you may still pay tax when you withdraw funds, but you won’t trigger capital gains along the way.
  • TFSA: Investment gains and withdrawals are tax-free, which makes the TFSA a potentially good place to put growth-oriented assets that may significantly increase in value.
  • RRSP: Investment gains grow tax-deferred while inside the account and are taxed as regular income once withdrawn. This account can be ideal for high-income earners who may be in a lower tax bracket in retirement.
  • FHSA: Investment gains and qualifying withdrawals are tax-free, making the FHSA a tax-efficient option for those looking to save toward their first home.

• Hold investments longer: Trading too frequently could trigger capital gains more often, unintentionally increasing your taxable income. Taking a longer‑term approach may help reduce the number of taxable events and keep more of your returns invested.
• Harvest losses to offset gains: Selling underperforming investments to offset gains (known as tax loss harvesting) can be effective, but be mindful of the superficial loss rule.  
• Donating securities “in kind”: When you donate publicly listed securities directly to a qualified charitable organization, you receive a tax receipt for the full market value of the shares, and any capital gains on the donation are not taxed.

Talking to a financial advisor can be a helpful way to understand how to manage your capital gains taxes. 

What else should you know about capital gains?

There are some other scenarios to keep in mind:

• House flipping rule: To ensure people are paying tax when house flipping, residential properties owned for less than 12 months are usually taxed as business income rather than as a capital gain. This means the full profit may be taxable, and the principal residence exemption typically won’t apply. There are specific exceptions for certain life events, such as divorce, death or relocation.
• Reporting is essential: Regardless of the situation, you must report capital gains to the CRA. Missing required forms, even if you sell your principal residence, may lead to penalties and a reassessment by the CRA.

The bottom line

Any time you realize a capital gain, 50% is taxable at your marginal tax rate. On the other hand, if you realize a capital loss, you can use that loss to offset any capital gains, either now or in the future.

With thoughtful planning, such as leveraging registered accounts, strategic tax loss harvesting and making charitable donations, you can meaningfully manage how much tax you pay on your investment gains. When in doubt, a financial advisor can help you build a plan that aligns with your goals.