How Capital Gains Tax Works in Canada (2025)

Capital gains tax is one of the most misunderstood parts of the Canadian tax system — not because it is complicated, but because most people only encounter it a few times in their life, usually at the worst possible time (right after selling a house, stock portfolio, or business).

This guide explains how it works in 2025, step by step, with no jargon.

What is a capital gain?

A capital gain happens when you sell (or are considered to have sold) a capital property for more than it cost you. Capital property includes:

• Stocks, ETFs, mutual funds, and bonds
• Real estate (other than your principal residence — more on that below)
• Business assets
• Cryptocurrency
• Artwork, jewellery, and collectibles

The gain equals your proceeds of disposition minus your adjusted cost base (ACB) and any costs you incurred to sell the property (commissions, legal fees).

Capital gain = Selling price − Selling costs − ACB

If the result is negative, you have a capital loss, which can be used to offset other gains.

The 50% inclusion rate for 2025

Canada does not tax 100% of your capital gain. Only half of it — called the taxable capital gain — is added to your income for the year.

Taxable capital gain = Capital gain × 50%

This taxable amount goes on line 12700 of your T1 return and is taxed at the same marginal rates as your other income.

For example: a $40,000 capital gain → $20,000 taxable capital gain → taxed at your marginal rate (say 43%) → $8,600 in tax. Your effective tax rate on the actual gain is 21.5% — exactly half your marginal rate.

The 50% inclusion rate has been in place since 2000 and remains unchanged for 2025.

What is the adjusted cost base?

The ACB is your "cost" of the property — the number that gets subtracted from the selling price to determine the gain.

For most assets, the ACB includes:

• The original purchase price
• Commissions and fees paid to acquire it
• Any capital improvements (for real estate)

For stocks purchased in multiple lots, the CRA requires a weighted average ACB across all shares of the same security. You cannot choose which lot you're selling. Use the ACB calculator to track this automatically.

Schedule 3 — Capital Gains or Losses

All capital dispositions must be reported on Schedule 3 of your T1 return, regardless of whether you have a gain, a loss, or no tax to pay. Schedule 3 has separate sections for:

• Qualified small business corporation shares
• Qualified farm and fishing property
• Real estate, depreciable property, and other properties
• Bonds, debentures, and similar properties
• Mutual funds and trust units
• Crypto-assets (Line 7 — added for crypto)
• Stocks and other publicly traded securities

Even if the gain is fully exempt (like a principal residence), you must still report the disposition.

Major exemptions

Principal residence exemption

If you sell your home and it qualifies as your principal residence for every year you owned it, the entire gain is tax-free. If it was your principal residence for only some of those years, you get a partial exemption.

The exemption is calculated by the formula: Capital gain × (1 + years designated as PR) ÷ total years owned.

Use the principal residence exemption calculator to see exactly how much is exempt and how much is taxable.

Lifetime Capital Gains Exemption (LCGE)

The LCGE shields up to $1,250,000 of capital gains on the sale of:

• Qualified small business corporation shares (QSBCS)
• Qualified farm property
• Qualified fishing property

This is one of the most powerful tax breaks available to Canadian small business owners and farmers. See the LCGE guide for the full details.

Capital losses

Net capital losses in the current year offset gains from the same year. If losses exceed gains, the net capital loss can be:

• Carried back up to 3 years (to recover taxes paid in 2022, 2023, or 2024)
• Carried forward indefinitely to future years

Capital losses can only reduce capital gains — they cannot offset employment income, rental income, or any other type of income.

Use the capital loss planner to calculate how losses affect your 2025 tax bill.

When to report a disposition

Always report in the calendar year the sale occurs — not when cash is received. If you sold stock on December 15, 2025, it goes on your 2025 return even if settlement is in early January 2026.

Related guides and tools

• Canadian Capital Gains Tax Calculator
• Capital Gains Inclusion Rate — History & 2025
• How to Calculate Adjusted Cost Base (ACB)
• Principal Residence Exemption Guide
• Lifetime Capital Gains Exemption 2025
• Capital Losses — Carryback & Carryforward
• Capital Gains Tax on Crypto in Canada
• ACB Calculator
• Principal Residence Exemption Calculator
• Capital Loss Planner