Capital Gains and Losses

A capital gain or loss arises on the disposition of capital property: property held to produce income or for long-term investment rather than as inventory for resale. Only half of a capital gain is taxable, which makes capital gains the most lightly taxed common form of investment income. Gains and losses are reported on Schedule 3, and the net taxable capital gain goes on line 12700.

THE CALCULATION

Proceeds of disposition: usually the sale price; fair market value for deemed dispositions and non-arm's length gifts.
Adjusted cost base (ACB): purchase price plus acquisition costs, adjusted for reinvested distributions, return of capital, and capital improvements (for real property).
Outlays and expenses: commissions, legal fees and other selling costs.
Capital gain = proceeds − ACB − outlays. Taxable capital gain = 50 percent of the gain.

THE INCLUSION RATE

The inclusion rate is 50 percent. A proposal to raise it to two-thirds for individuals' gains above $250,000 (announced in 2024) was cancelled in March 2025, so the 50 percent rate continues for all gains.

CAPITAL LOSSES

Allowable capital losses (50 percent of losses) can only be deducted against taxable capital gains.
Net losses can be carried back three years or forward indefinitely.
Superficial loss rule: a loss is denied if the same property is repurchased by the taxpayer or an affiliated person within 30 days before or after the sale; the denied loss is added to the new ACB.
Losses on personal-use property (cars, boats, furniture) are not deductible.

CAPITAL OR INCOME?

Gains are business income (fully taxable) rather than capital gains when property is bought with the intention of resale at a profit, such as frequent day trading, or when real estate is sold quickly. Factors include holding period, frequency of transactions, knowledge of markets, use of borrowed money, and the taxpayer's stated intention. Since 2023, residential property (including assignment sales) held less than 365 days is deemed to be business income under the property flipping rule, unless a life event such as death, separation, job relocation or disability applies. Investors in Canadian securities can file Form T123 to elect to treat all Canadian securities as capital property permanently.

CAPITAL GAINS RESERVE

When proceeds are received over time (vendor take-back financing), a reserve can spread the gain over up to five years (ten years for certain family farm, fishing and small business transfers). Claimed on Form T2017.

WORKED EXAMPLE

An investor buys 100 shares for $5,000 plus a $10 commission (ACB $5,010) and sells them years later for $8,000 minus a $10 commission. The capital gain is $8,000 − $5,010 − $10 = $2,980. The taxable capital gain is $1,490, which is added to income. At a 29.65 percent Ontario marginal rate, the tax is about $442, an effective rate of about 14.8 percent on the gain.

FOREIGN CURRENCY

Gains on foreign currency are capital gains, with the first $200 of net foreign exchange gains or losses each year exempt for individuals.