Capital Gains Inclusion Rate in Canada: 2025 Guide

When you sell an investment for more than you paid for it, you have a capital gain. Canada does not tax 100% of that gain — only a portion is “included” in your income. Understanding the inclusion rate, and the key exemptions that can eliminate tax entirely, is essential for any Canadian investor.

The Inclusion Rate: 50% in 2025

Canada’s capital gains inclusion rate for individuals remains 50% in 2025. This means only half of your capital gain is added to your taxable income in the year of the sale.

The other half is completely tax-free.

Capital gain = Proceeds of disposition − Adjusted cost base (ACB) − Selling expenses

Taxable capital gain = Capital gain × 50%

What Is the Adjusted Cost Base?

The Adjusted Cost Base (ACB) is what you paid for the asset, including:

• Purchase price
• Brokerage commissions paid on purchase
• For mutual funds or ETFs: reinvested distributions (which increase your ACB)
• For rental property: legal fees, land transfer tax, major improvements

If you inherited or received an asset as a gift, special rules apply to determine your ACB (generally the fair market value at the date of inheritance or gift).

Worked Example: Selling Stocks

James bought 500 shares of a Canadian company at $20/share in 2020. He sells them in 2025 at $45/share. Brokerage commission on sale: $25.

Capital gain = (500 × $45 − $25) − (500 × $20) = $22,475 − $10,000 = $12,475

Taxable capital gain (50% inclusion) = $12,475 × 50% = $6,238

If James is in Ontario with combined marginal rate of 43.41% on the next dollar:

Tax payable on this gain = $6,238 × 43.41% = $2,708

Effective tax rate on the actual gain ($12,475): $2,708 ÷ $12,475 = 21.7%

This is why capital gains are often said to be “taxed at half the rate” of ordinary income — the real effective rate is approximately half the marginal rate, because only half the gain is included.

Capital Losses Can Offset Capital Gains

If you sell an investment at a loss, you have a capital loss. Capital losses can only offset capital gains — they cannot reduce employment income or other income.

Rules:

• Net capital losses in the current year first offset capital gains in the current year.
• Any remaining net capital loss can be carried back 3 years or carried forward indefinitely to offset future capital gains.
• Superficial loss rule: if you sell a security at a loss and you or an affiliated person repurchases the same or identical security within 30 days before or after the sale, the loss is denied.

Proposed Changes: The 2024/2025 Inclusion Rate Debate

In Budget 2024, the federal government proposed raising the inclusion rate from 50% to 66.67% for gains above $250,000 in a year for individuals (corporations would face 66.67% on all gains). The legislation was introduced but not passed before Parliament was prorogued. As of the 2025 tax year, the inclusion rate for individuals remains 50%.

If Parliament passes inclusion rate changes retroactive to 2024 or effective in 2025, the calculations above would change. Monitor the CRA website and federal budget announcements for updates.

Principal Residence Exemption

Your home is generally the biggest capital asset most Canadians own — and it may be entirely tax-free when you sell it.

The Principal Residence Exemption (PRE) eliminates capital gains tax on the sale of a property that was your principal residence for every year you owned it. You designate a property as your principal residence using the Principal Residence Designation (Schedule 3 of your T1).

One property per family unit per year. Couples and minor children count as one family unit.

If you owned a property for 10 years and it was your principal residence for all 10 years, 100% of the gain is exempt.

If it was your principal residence for only 7 of 10 years (e.g., you rented it for 3 years), the exemption covers 8/10 of the gain (the formula adds 1 to the numerator: “number of years as principal residence + 1, divided by total years owned”).

Lifetime Capital Gains Exemption (LCGE)

The LCGE provides a major tax break for:

• Qualifying small business corporation shares (QSBC shares)
• Qualified farm property
• Qualified fishing property

For 2025, the LCGE limit for QSBC shares is $1,250,000. This means an individual can shelter up to $1.25 million in capital gains on the sale of a qualifying small business entirely from tax — potentially a $270,000+ tax saving.

Strict eligibility rules apply. The shares must meet tests for being Canadian-controlled private corporations (CCPC) with certain asset composition requirements.

Capital Gains on Foreign Property

Capital gains on foreign investments are still taxed in Canada (you are taxed on worldwide income). However, any foreign tax paid on the gain may generate a Foreign Tax Credit to reduce Canadian tax owing. Report foreign property with a cost over $100,000 on Form T1135.

Filing: Schedule 3

All capital dispositions are reported on Schedule 3 of your T1 return, regardless of whether a gain or loss results. Even if the principal residence exemption eliminates all tax, you must still report the sale since 2016 (the CRA changed the reporting requirement that year).

Key Takeaways

• The capital gains inclusion rate for individuals in 2025 is 50% — only half the gain is taxable.
• Effective tax on capital gains is roughly half your marginal rate (e.g., 21.7% if marginal rate is 43.41%).
• Capital losses offset capital gains and can be carried back 3 years or forward indefinitely.
• The Principal Residence Exemption can eliminate all capital gains tax on your home.
• The Lifetime Capital Gains Exemption shelters up to $1,250,000 in gains on qualifying small business shares.
• All dispositions must be reported on Schedule 3, even if no tax is owing.