Capital Gains Tax in Canada 2026 — How It Works and How to Pay Less

Bottom line: Canada taxes 50% of your capital gains at your marginal rate. Sell stock for a $50,000 profit at an $80,000 salary and you will owe roughly $7,500 in tax. The principal residence exemption, lifetime capital gains exemption, and strategic use of capital losses can significantly reduce or eliminate that bill.

1What Is a Capital Gain?

A capital gain is the profit you make when you sell a capital property for more than you paid. Capital properties include publicly traded stocks, ETFs, mutual funds, rental real estate, cryptocurrency, and shares of a private corporation. Collectibles such as art, jewelry, and rare coins also count as capital property if sold at a profit.

The CRA calculates your gain as:

Capital Gain = Proceeds of Disposition - Adjusted Cost Base - Outlays and Expenses

Your adjusted cost base (ACB) is typically what you paid for the asset plus any acquisition costs like commissions. For real estate, the ACB also includes the cost of permanent improvements you made to the property (a new roof, a renovated kitchen) but not routine maintenance. Outlays and expenses include selling commissions, legal fees on a property sale, and transfer taxes.

A capital loss occurs when your proceeds are less than your ACB plus expenses. Capital losses are valuable because they can offset capital gains and reduce your tax bill, as explained below.

Superficial Losses and Deemed Dispositions

Not every sale triggers a straightforward gain or loss. The CRA has rules for specific situations:

• Superficial loss rule: If you sell a security at a loss and repurchase the same or identical property within 30 days before or after the sale (a 61-day window), the loss is denied. The denied loss is added to the ACB of the repurchased property.
• Deemed disposition on death: When a taxpayer dies, the CRA treats all capital property as if it was sold at fair market value on the date of death. The estate must report any resulting gains unless the property transfers to a surviving spouse.
• Deemed disposition on emigration: If you leave Canada, you are considered to have sold most of your capital property at fair market value. You may owe departure tax on unrealized gains.

2The 50% Inclusion Rate for 2026

In 2026, the capital gains inclusion rate remains at 50% for all taxpayers. The proposed increase to 66.67% on gains above $250,000 (announced in the 2024 federal budget) was formally cancelled.

This means only half of your capital gain gets added to your taxable income. The other half is completely tax-free.

Your effective tax rate on capital gains depends on your marginal tax bracket. Here is a quick reference for common combined federal-provincial rates:

The formula is simple: your combined marginal tax rate multiplied by the 50% inclusion rate equals your effective capital gains rate.

3Worked Example: $50,000 Stock Profit

Say you are employed in Ontario with an $80,000 salary and you sell shares for a $50,000 capital gain in 2026.

• Taxable capital gain: $50,000 x 50% = $25,000
• Total taxable income: $80,000 + $25,000 = $105,000
• Federal tax on employment income ($80,000): ~$9,240
• Federal tax on the extra $25,000 (all in the 20.5% bracket): ~$5,100
• Ontario tax on the extra $25,000 (including the health premium step-up): ~$2,400
• Approximate tax on the capital gain alone: ~$7,500

Your effective tax rate on the $50,000 gain is about 15%. Use our tax calculator to model your exact situation with your province and deductions.

What If the Gain Were $200,000?

At larger gains, you push into higher brackets. A $200,000 capital gain on top of $80,000 salary:

• Taxable capital gain: $200,000 x 50% = $100,000
• Total taxable income: $80,000 + $100,000 = $180,000
• Tax on the $100,000 gain (crossing into the 26% federal bracket and Ontario's higher brackets and surtax): ~$39,300
• Effective rate on the gain: ~19.7%

Even at $200,000 in gains, the effective rate stays well below your marginal income tax rate thanks to the 50% inclusion rate.

4Principal Residence Exemption

If you sell your home and it qualifies as your principal residence for every year you owned it, the entire capital gain is tax-free. This is the single most valuable tax exemption available to Canadian homeowners.

To claim the exemption, you must designate the property as your principal residence on Schedule 3 and Form T2091 when you file your return. The CRA requires you to report the sale even when the gain is fully exempt.

Key rules:

• Only one property per family unit (you plus your spouse or common-law partner) can be designated as a principal residence per year
• The property must be "ordinarily inhabited" during the year by you, your spouse, or your children
• The exemption formula includes a "+1" rule that allows one year of overlap when you buy and sell in different years

The Principal Residence Exemption Formula

The exempt portion is calculated as:

Exempt Gain = Capital Gain x (1 + Years Designated) / Years Owned

Example: You owned a home for 10 years, designated it as your principal residence for all 10 years, and sold for a $300,000 gain:

Exempt Gain = $300,000 x (1 + 10) / 10 = $300,000 x 1.1 = $330,000

Since the exempt amount exceeds the actual gain, the entire $300,000 is tax-free. The "+1" rule creates this buffer, which is particularly helpful when you sell one home and buy another in the same year.

Partial Exemption When You Change Use

If you convert your principal residence to a rental property (or vice versa), you may only be able to designate it as your principal residence for part of the ownership period. The gain is prorated, and the non-exempt portion is taxable.

You can elect under subsection 45(2) to defer the change-of-use disposition for up to four years, maintaining the principal residence designation even while renting the property.

5Lifetime Capital Gains Exemption (LCGE)

If you sell qualifying small business corporation shares, the 2026 LCGE shelters up to $1,250,000 in capital gains from tax.

To qualify, the shares must meet three tests:

• Small business corporation test at time of sale (90%+ of assets used in active business in Canada)
• Holding period test (you owned the shares for at least 24 months)
• Asset test (50%+ of assets used in active business throughout the 24 months before sale)

Qualifying farm and fishing property also qualifies for the LCGE at the same $1,250,000 limit.

How Much Tax Does the LCGE Save?

At a combined marginal rate of 50%, the LCGE saves:

$1,250,000 x 50% inclusion x 50% tax rate = $312,500 in tax savings

This makes the LCGE one of the most powerful tax shelters in the Canadian tax system. If you are building a business with the intention of selling, structuring for LCGE eligibility should be a priority from day one.

6Using Capital Losses to Offset Gains

Capital losses can only be applied against capital gains, not against other income. If your capital losses exceed your capital gains in a year, the net capital loss can be:

• Carried back 3 years to offset gains reported in those years
• Carried forward indefinitely to offset future gains

This makes tax-loss harvesting a powerful year-end strategy. If you hold investments with unrealized losses, selling them before December 31 generates a capital loss you can use to offset gains realized earlier in the year.

Important: the CRA's superficial loss rule prevents you from repurchasing the same or identical property within 30 calendar days before or after the sale. If you do, the loss is denied.

Practical Tax-Loss Harvesting Example

You realized $30,000 in capital gains from selling ETF units in March 2026. In November, you hold a Canadian bank stock that is down $12,000 from your purchase price.

1. Sell the bank stock before December 31 to realize a $12,000 capital loss
2. Net capital gain for 2026: $30,000 - $12,000 = $18,000
3. Taxable capital gain: $18,000 x 50% = $9,000 (instead of $15,000)
4. Tax saved at 30% marginal rate: $1,800

If you still want exposure to the banking sector, you can purchase a different bank stock immediately (e.g., sell TD, buy RY) without triggering the superficial loss rule.

7How to Report Capital Gains

Capital gains and losses are reported on Schedule 3 of your T1 return. You will need:

• Date of acquisition and date of sale
• Proceeds of disposition (selling price)
• Adjusted cost base
• Outlays and expenses (commissions, legal fees)

Your brokerage will issue T5008 slips for securities sold during the year. Note that T5008 slips often do not include your ACB, so you are responsible for tracking it yourself. For mutual funds with reinvested distributions, your ACB includes all reinvested amounts.

The CRA expects you to report all dispositions, even if the gain is zero or you are claiming a loss.

Tracking Your ACB

Accurate ACB tracking is critical. Common situations that affect your ACB:

For mutual funds held outside registered accounts, return of capital distributions are particularly tricky. They reduce your ACB over time, meaning your eventual capital gain will be larger. Many investors fail to track this and overpay tax.

8Strategies to Reduce Capital Gains Tax

Use registered accounts first. Gains inside a TFSA are completely tax-free. Gains inside an RRSP are tax-deferred. Prioritize holding your highest-growth investments in these accounts.

Time your dispositions. If you expect lower income next year (retirement, parental leave, sabbatical), deferring a sale to a lower-income year means a lower marginal rate on the gain.

Donate appreciated securities. Donating publicly traded shares directly to a registered charity eliminates the capital gains tax entirely and gives you a donation tax credit on the full fair market value.

Claim all eligible expenses. Legal fees, accounting fees related to the disposition, and real estate commissions all reduce your net gain.

Track your ACB meticulously. Especially for investments with dividend reinvestment plans (DRIPs) or return of capital distributions. An understated ACB means you report a larger gain than you actually realized.

Use the capital gains reserve. If you sell property and will receive the proceeds over multiple years (e.g., vendor take-back mortgage), you can spread the capital gain over up to five years using a capital gains reserve. This keeps each year's taxable gain in lower brackets.

Gift to a spouse strategically. While attribution rules generally apply, if your spouse invests the gifted money and earns a capital gain on the invested amount, those second-generation gains (gains on gains) are not attributed back to you.

9Capital Gains on Cryptocurrency

The CRA treats cryptocurrency as a commodity for tax purposes. Disposing of cryptocurrency (selling, trading for another crypto, or using it to buy goods) triggers a capital gain or loss.

Common crypto tax situations:

The CRA has been increasingly active in auditing cryptocurrency transactions. Using a crypto tax tracking tool (like Koinly or CoinTracker) is strongly recommended.

10Capital Gains on Real Estate (Non-Principal Residence)

If you sell a rental property, cottage, or investment property, the gain is taxable. Key considerations:

• Land transfer tax and legal fees at purchase are added to your ACB
• Capital improvements (not repairs) increase your ACB
• CCA claimed reduces your ACB and increases your eventual gain (CCA recapture)
• Selling costs (realtor commissions, legal fees) reduce your proceeds

Example: You bought a rental condo for $400,000, spent $30,000 on improvements, claimed $15,000 in CCA over the years, and sold for $550,000 with $25,000 in selling costs.

• ACB: $400,000 + $30,000 - $15,000 = $415,000
• Net proceeds: $550,000 - $25,000 = $525,000
• Capital gain: $525,000 - $415,000 = $110,000
• Taxable capital gain: $55,000
• CCA recapture (taxed as regular income): $15,000

11What to Do Before Year-End

1. Review unrealized gains and losses across all non-registered accounts
2. Harvest losses to offset gains realized earlier in the year (mind the superficial loss rule)
3. Consider deferring sales if you expect lower income next year
4. Donate appreciated securities before December 31 if you plan charitable giving
5. Confirm your ACB for all positions, especially those with DRIP or return of capital
6. File on time and report all dispositions on Schedule 3

12Calculate Your Capital Gains Tax

Every dollar of capital gains hits a different marginal bracket depending on your other income and province. Use our free tax calculator to model the exact impact of a capital gain on your 2026 tax bill.

13Frequently Asked Questions

Do I pay capital gains tax on my TFSA investments?

No. All gains inside a TFSA are completely tax-free, regardless of the amount. This is one of the main advantages of maximizing your TFSA contributions.

What if I sell an investment at a loss?

The loss can offset capital gains in the current year, be carried back three years, or carried forward indefinitely. Capital losses cannot offset other types of income (employment, business, rental).

Is there a minimum capital gain that is tax-free?

No. All capital gains are reportable, regardless of size. However, the basic personal amount means that if capital gains are your only income, the first ~$16,500 of taxable income (including the taxable portion of gains) is effectively tax-free.

How are capital gains taxed on death?

The CRA treats all capital property as sold at fair market value on the date of death. Any resulting gains are taxable on the deceased's final return, unless the property transfers to a surviving spouse (which defers the gain).

Are capital gains from a foreign country taxed in Canada?

Yes. Canadian residents pay tax on worldwide income, including foreign capital gains. However, you may claim a foreign tax credit if the other country also taxed the gain, to avoid double taxation.

Can I gift property to avoid capital gains tax?

No. The CRA treats a gift as a disposition at fair market value. You are deemed to have sold the property at its current value, triggering a capital gain. The exception is transfers to a spouse, which can occur at ACB (deferred gain).

14Sources

• CRA Guide T4037 — Capital Gains (opens in a new tab)
• CRA — Schedule 3 — Capital Gains or Losses (opens in a new tab)
• CRA — TFSA (opens in a new tab)
• CRA — RRSP and Related Plans (opens in a new tab)
• CRA — Payroll Deductions Formulas (T4127) (opens in a new tab)
• CRA — Lifetime Capital Gains Exemption (opens in a new tab)

For detailed rules, see CRA Guide T4037 (Capital Gains) and the Schedule 3 instructions at canada.ca.