Capital gains tax is a topic that often sparks confusion for Canadians, whether you’re selling an investment property, cashing out stocks, or transferring a family business. Understanding how capital gains tax works can save you thousands and help you make smarter financial decisions with the support of professional accounting services. In this comprehensive guide, we’ll cover everything you need to know about capital gains tax in Canada for 2025, including calculations, exemptions, planning strategies, and recent changes. Let’s dive in!
What Is Capital Gains Tax?
Capital gains tax is levied by the Canada Revenue Agency (CRA) on the profit you earn when you sell an asset for more than you paid for it. This profit, known as a capital gain, applies to real estate, stocks, bonds, mutual funds, and even business assets. Unlike regular income, only a portion of your capital gain is taxable, which we’ll explain below.
Key Terms
- Capital Gain: The difference between an asset’s selling price and its adjusted cost base (ACB), which includes the purchase price plus eligible expenses (e.g., commissions or improvements).
- Capital Loss: If you sell an asset for less than its ACB, you incur a capital loss, which can offset capital gains.
- Inclusion Rate: The percentage of a capital gain included in your taxable income.
How Is Capital Gains Tax Calculated?
Calculating capital gains tax in Canada involves three main steps: determining the capital gain, applying the inclusion rate, and adding the taxable amount to your income.
Step 1: Calculate the Capital Gain
The formula is:
Capital Gain = Selling Price – Adjusted Cost Base (ACB) – Selling Expenses
Example: You bought a rental property in 2018 for $300,000 and spent $20,000 on renovations (ACB = $320,000). In 2025, you sell it for $500,000, incurring $15,000 in realtor fees.
- Capital Gain = $500,000 – $320,000 – $15,000 = $165,000
Step 2: Apply the Inclusion Rate
The inclusion rate determines how much of your capital gain is taxable. As of June 25, 2024, the federal government increased the inclusion rate for certain taxpayers:
- Individuals: 50% for capital gains up to $250,000 annually; 66.67% (two-thirds) for gains above $250,000.
- Corporations and Trusts: 66.67% for all capital gains, regardless of amount.
Example (Individual): For your $165,000 capital gain as an individual:
- Taxable Capital Gain = $165,000 × 50% = $82,500 (since the gain is below $250,000).
If your gain was $300,000:
- First $250,000: $250,000 × 50% = $125,000 taxable.
- Remaining $50,000: $50,000 × 66.67% = $33,335 taxable.
- Total Taxable Capital Gain = $125,000 + $33,335 = $158,335.
Example (Corporation): For a $165,000 capital gain:
- Taxable Capital Gain = $165,000 × 66.67% = $110,005.
Step 3: Add to Taxable Income
The taxable capital gain is added to your income and taxed at your marginal tax rate, which depends on your province and income level. For 2025, marginal rates in British Columbia for an individual earning $100,000 (including the taxable capital gain) are approximately 38.3% (combined federal and provincial).
Example (Individual in BC):
- Taxable Capital Gain = $82,500.
- Tax = $82,500 × 38.3% ≈ $31,598.
Example (Corporation in BC):
- Taxable Capital Gain = $110,005.
- Corporate tax rate (assuming general rate, not small business rate) = 27% (15% federal + 12% provincial).
- Tax = $110,005 × 27% ≈ $29,701.
Capital Losses
If you have a capital loss, you can use it to offset capital gains in the same year. If losses exceed gains, you can carry them back three years or forward indefinitely to reduce future capital gains.
Example: You sell stocks for a $50,000 capital gain and another for a $20,000 capital loss.
- Net Capital Gain = $50,000 – $20,000 = $30,000.
- Taxable Capital Gain = $30,000 × 50% = $15,000 (for an individual).
Recent Changes to Capital Gains Tax (2024-2025)
On June 25, 2024, the federal government implemented significant changes to the capital gains inclusion rate, sparking debate among taxpayers and businesses:
- Increased Inclusion Rate: As noted, individuals now face a 50% inclusion rate up to $250,000 in annual gains and 66.67% above that. Corporations and trusts face 66.67% on all gains.
- Impact: This change increases the tax burden, especially for high-net-worth individuals and businesses selling valuable assets. For example, a corporation with a $1 million capital gain now pays tax on $666,700 (vs. $500,000 at the old 50% rate).
- Rationale: The government aims to raise revenue for social programs, estimating an additional $19.4 billion over five years, while arguing that the change affects only 0.13% of Canadians directly.
Transitional Rules
For tax years straddling June 25, 2024:
- Gains before June 25, 2024, use the 50% inclusion rate.
- Gains after use the new rates, with the $250,000 threshold for individuals applied annually.
Tip: If you planned a large asset sale in 2024, completing it before June 25 may have saved significant taxes. For 2025, plan sales strategically to stay below the $250,000 threshold if possible.
Exemptions and Deferrals
Several exemptions and strategies can reduce or defer capital gains tax, making them critical for tax planning.
1. Principal Residence Exemption (PRE)
Your primary residence is exempt from capital gains tax when sold, provided it’s your main home for the entire ownership period.
- Eligibility: You, your spouse, or your children must ordinarily live in the home. Only one property per family qualifies annually.
- Partial Exemption: If you rent out part of your home or use it for business, you may need to apportion the gain, with only the residential portion exempt.
- Action: Designate your property as your principal residence on Form T2091 when selling, and keep records of ownership and use.
Example: You sell your Toronto home for a $400,000 gain. If it’s your principal residence, the entire gain is tax-free.
2. Canadian Business Succession Deduction
Introduced in Bill C-59 (2024), this deduction allows eligible transfers of family businesses to children or grandchildren to be treated as capital gains rather than dividends, preserving access to the Lifetime Capital Gains Exemption (LCGE).
- Eligibility: The business must be a qualified small business corporation (QSBC) or family farm/fishing corporation, and the transfer must meet specific conditions (e.g., the child must control the business post-transfer).
- Action: Work with an accountant to structure the transfer to meet CRA criteria.
3. Lifetime Capital Gains Exemption (LCGE)
The LCGE allows individuals to shield capital gains from selling qualified small business corporation (QSBC) shares or farm/fishing property.
- 2025 Limit: Up to $1,250,000 per individual (indexed annually).
- QSBC Requirements:
- The corporation is a CCPC.
- At least 90% of assets are used in an active business in Canada.
- You’ve held the shares for at least 24 months.
- Action: File Form T657 to claim the LCGE and ensure your corporation meets QSBC criteria.
Example: You sell QSBC shares for a $1,000,000 gain. With the LCGE, the entire gain is tax-free, saving approximately $383,000 in taxes (at a 38.3% marginal rate in BC).
4. Capital Gains Reserve
If you sell an asset but receive payments over multiple years (e.g., a business sale with installments), you can spread the capital gain over up to five years to defer tax.
- Rule: At least one-fifth of the gain must be reported annually.
- Action: File Form T2017 to claim the reserve and consult an accountant to optimize deferral.
Example: You sell a business for a $500,000 gain, receiving $100,000 annually over five years. In 2025, you report $100,000 × 50% = $50,000 as taxable, spreading the tax liability.
Tax Planning Strategies
Effective tax planning can minimize your capital gains tax. Here are practical strategies for 2025:
1. Time Your Sales
- Individuals: Sell assets to keep annual gains below $250,000 to benefit from the 50% inclusion rate.
- Loss Harvesting: Sell underperforming assets to realize losses, offsetting gains in the same year or carrying them back/forward.
Example: If you have a $300,000 gain, sell $250,000 in 2025 and $50,000 in 2026 to stay under the threshold each year.
2. Use Tax-Advantaged Accounts
- RRSPs and TFSAs: Gains within Registered Retirement Savings Plans (RRSPs) or Tax-Free Savings Accounts (TFSAs) are tax-free or tax-deferred.
- Action: Maximize contributions ($32,490 for RRSPs, $7,000 for TFSAs in 2025) to shelter investment growth.
3. Gift Assets Strategically
Transferring assets to a spouse or charity can defer or eliminate capital gains tax:
- Spousal Rollover: Transfer assets to your spouse at ACB, deferring gains until they sell.
- Charitable Donations: Donating appreciated securities to a registered charity eliminates capital gains tax and provides a donation credit.
Example: You donate shares with a $50,000 gain. You avoid $9,575 in tax (at 38.3%) and get a donation credit.
4. Incorporate for Business Sales
Selling business assets through a corporation may allow access to the LCGE or lower corporate tax rates, though the 66.67% inclusion rate applies.
5. Work with a Professional
A tax professional can tailor strategies to your situation, ensuring compliance and maximizing savings.
Common Pitfalls to Avoid
- Missing the PRE: Failing to designate your principal residence can trigger unexpected taxes. Always file Form T2091.
- Ignoring Losses: Not tracking capital losses means missing opportunities to offset gains.
- Misreporting ACB: Incorrectly calculating the adjusted cost base (e.g., omitting improvements) can inflate your tax bill.
- Non-Compliance: Underreporting gains or failing to file forms like T657 for the LCGE can lead to CRA audits and penalties.
Impact on Small Businesses and Investors
The 2024 inclusion rate increase has significant implications:
- Small Businesses: Selling a business now incurs higher taxes, especially for corporations. The LCGE and business succession deduction are critical tools to mitigate this.
- Investors: High-net-worth individuals with large portfolios face increased taxes on gains above $250,000, making TFSAs and loss harvesting more important.
- Real Estate: Non-principal residence properties (e.g., cottages or rentals) are now more expensive to sell, emphasizing the need for strategic timing.
Final Thoughts
Capital gains tax in Canada is a complex but manageable part of financial planning. By understanding calculations, exemptions, and strategies, you can reduce your tax burden and keep more of your hard-earned money. Proactive planning is key, whether you’re selling a property, cashing out investments, or passing on a family business. The 2024 inclusion rate changes make professional guidance more valuable than ever.
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