Understanding how capital gains and losses are taxed in Canada is essential for any individual who sells investments, real estate, or other capital property. While capital gains can increase your taxable income, capital losses can be used strategically to reduce your tax burden. This blog provides a comprehensive overview of what individuals need to know about capital gains and losses when filing their Canadian income tax return.
1. What Is a Capital Gain?
A capital gain occurs when you sell a capital asset for more than its adjusted cost base (ACB). Capital assets include stocks, bonds, mutual funds, real estate (excluding your principal residence), and other investment property.
Capital gain formula:
- Capital Gain = Proceeds of Disposition − Adjusted Cost Base (ACB) − Expenses Incurred to Sell
Example: If you bought shares for $10,000 and sold them for $15,000, incurring $500 in selling fees, your capital gain is:
- $15,000 − $10,000 − $500 = $4,500
2. Taxation of Capital Gains in Canada
In Canada, only a portion of your capital gain is taxable. As of 2025, 50% of the capital gain is included in your income and taxed at your marginal tax rate. This is referred to as the “taxable capital gain.”
Using the example above, a $4,500 capital gain means $2,250 will be included in your taxable income. If your marginal tax rate is 30%, you’ll owe approximately $675 in taxes.
3. What Is a Capital Loss?
A capital loss occurs when you sell a capital asset for less than its adjusted cost base. Capital losses can only be used to offset capital gains—they cannot be applied against regular income (e.g., from employment).
Capital loss formula:
- Capital Loss = Adjusted Cost Base − Proceeds of Disposition − Selling Expenses
For example, if you bought shares for $12,000 and sold them for $9,000 (with $300 in fees), your capital loss would be:
- $12,000 − $9,000 − $300 = $2,700
4. How to Use Capital Losses
Capital losses can be used to offset capital gains in several ways:
- In the current year: Apply capital losses against capital gains to reduce taxable income.
- Carried back: Apply capital losses to any of the three preceding tax years using Form T1A (Request for Loss Carryback).
- Carried forward: Capital losses can be carried forward indefinitely and used in future years to offset gains.
Note: You must first apply losses to current year gains before carrying them back or forward.
5. Reporting Capital Gains and Losses
Individuals must report capital transactions on Schedule 3 – Capital Gains (or Losses) of the T1 General tax return. This schedule captures all dispositions of capital property, including:
- Publicly traded shares and mutual funds
- Real estate other than your principal residence
- Cryptocurrency (considered a capital or business asset depending on use)
- Business assets
CRA requires that all transactions be supported with documentation, including purchase dates, ACB, proceeds, and expenses related to the sale.
6. Principal Residence Exemption
Gains from the sale of your principal residence are typically tax-free. However, starting in recent years, you must still report the sale of your principal residence on your tax return to claim the exemption.
Use Form T2091 (IND) to designate the property as your principal residence. If not reported, the CRA may apply penalties or deny the exemption.
7. Superficial Loss Rule
The CRA has strict rules regarding superficial losses. If you sell a security at a loss and buy it back within 30 calendar days before or after the sale—and you or an affiliated person still owns it—the loss will be disallowed.
The disallowed loss is added to the adjusted cost base of the repurchased property, effectively postponing the loss until the asset is disposed of in a non-superficial transaction.
8. Capital Gains Election and Adjusted Cost Base Adjustments
In certain historical situations (such as the 1994 capital gains exemption), taxpayers were allowed to elect a higher ACB. While this no longer applies to new property, some taxpayers still have carryover impacts and must keep detailed records.
Also, adjustments to ACB may occur through return of capital distributions, reinvested dividends, or corporate actions like stock splits. Accurate record-keeping is essential.
9. Tax Treatment for Different Types of Assets
a. Real Estate (Non-Principal Residence)
Gains from selling rental properties, vacation homes, or investment real estate are taxable as capital gains. You may also face recapture of Capital Cost Allowance (CCA) previously claimed, which is fully taxable as regular income.
b. Mutual Funds and ETFs
Capital gains distributions from mutual funds are reported on T3 or T5 slips. Selling mutual fund units may also trigger capital gains or losses, separate from distributed income.
c. Cryptocurrency
The CRA considers cryptocurrency transactions to be either capital or business income, depending on your intent and activity. Most casual investors will report it as capital, while active traders may be classified as business income (100% taxable).
10. Capital Gains Reserve
If you sell capital property and receive payment over several years (such as a property installment sale), you may defer reporting some of the gain by claiming a capital gains reserve. This allows you to spread the gain over a maximum of five years.
The reserve must decrease each year, and at least 20% of the gain must be reported annually.
11. Common Mistakes to Avoid
- Failing to report the sale of your principal residence
- Using incorrect ACB figures
- Claiming losses that are actually superficial
- Mixing up capital gains with business income
- Not keeping documentation for purchase and sale dates
- Neglecting to apply capital losses carried forward from prior years
12. Summary: Key Takeaways for Taxpayers
- Only 50% of capital gains are taxable
- Capital losses can offset gains now, be carried back 3 years, or forward indefinitely
- Use Schedule 3 and Form T1A to report gains/losses and request carrybacks
- Principal residence sales must be reported to claim the exemption
- Maintain detailed records to support ACB, proceeds, and expenses
Capital gains and losses play a crucial role in your overall tax liability. By understanding the rules and taking proactive steps to document and report your transactions correctly, you can minimize taxes and maximize strategic use of losses.
If you have complex transactions, such as inherited property, business shares, or cryptocurrency trading, consider consulting a qualified tax advisor for tailored guidance.
