Capital gains are a significant component of the Canadian tax system, especially for individuals who invest in stocks, mutual funds, real estate, or other capital property. If you sell a capital asset and make a profit, you may be required to report that gain to the Canada Revenue Agency (CRA) and pay taxes on it. Understanding how to properly report and pay taxes on capital gains can help you stay compliant and avoid unnecessary penalties or audits.
1. What Are Capital Gains?
Capital gains occur when you sell or are considered to have sold a capital property for more than its adjusted cost base (ACB) plus any expenses incurred to sell it. Capital property includes things like stocks, mutual funds, bonds, real estate (excluding principal residences), business shares, and cryptocurrency.
Basic Capital Gain Formula:
- Capital Gain = Proceeds of Disposition − Adjusted Cost Base − Selling Expenses
For example, if you bought shares for $10,000 and sold them for $15,000, with $500 in selling commissions, your capital gain would be:
- $15,000 − $10,000 − $500 = $4,500 capital gain
2. What Portion of Capital Gains Is Taxable?
In Canada, only a portion of your capital gains is taxable. As of 2025, the inclusion rate is 50%. This means that only half of your net capital gain is included in your income and taxed at your marginal tax rate.
Using the above example, a $4,500 gain results in a $2,250 taxable capital gain. If your marginal tax rate is 30%, you’ll owe approximately $675 in tax.
3. Reporting Capital Gains: Schedule 3
To report capital gains on your T1 Personal Income Tax Return, you need to complete Schedule 3 – Capital Gains (or Losses). This form captures detailed information about each type of capital property disposed of during the tax year.
Schedule 3 sections include:
- Publicly traded shares, mutual funds, and other securities
- Real estate and depreciable property
- Bonds and other debt obligations
- Personal-use property and listed personal property (e.g., artwork)
- Other properties
You must report each transaction, including the date of acquisition and disposition, proceeds of disposition, ACB, and selling costs.
4. How to Calculate Adjusted Cost Base (ACB)
The ACB is the original purchase price of an asset plus any costs associated with acquiring it (e.g., commissions, legal fees, reinvested dividends). If you acquired multiple identical properties over time (such as shares), you must use the average cost method to calculate ACB per unit.
It is important to track your ACB accurately. Failure to do so can result in overstated gains and excessive taxes.
5. Filing the Capital Gain on Your Tax Return
Once Schedule 3 is complete, the total capital gain or loss is transferred to line 12700 of your T1 General return. The CRA uses this amount to calculate the taxable portion that adds to your total income.
If you have capital losses from the same year or prior years, they will reduce the taxable amount. Ensure you also fill out appropriate carryforward or carryback forms (see below).
6. Paying Taxes on Capital Gains
Any tax owing due to capital gains must be paid by the regular filing and payment deadline:
- April 30, 2025 for most individuals
- June 15, 2025 for self-employed individuals (payment still due by April 30)
There is no separate payment schedule for capital gains. The taxes owed on capital gains are included in your overall balance owing on your T1 return.
7. Capital Losses and How They Offset Gains
If you sold an asset for less than its ACB, you may have a capital loss. These losses can be used to offset capital gains, but only against other capital gains—not regular income.
Using Capital Losses:
- Offset capital gains in the same year
- Carry back up to 3 years using Form T1A – Request for Loss Carryback
- Carry forward indefinitely to offset future capital gains
Report all capital losses on Schedule 3, even if you don’t need to use them this year. CRA tracks your unused losses and applies them in future years when applicable.
8. Superficial Loss Rule
The superficial loss rule prevents taxpayers from claiming a capital loss when they repurchase the same or an identical asset within 30 days before or after the sale. If the rule applies, the loss is disallowed and added to the ACB of the new asset.
This rule is designed to prevent taxpayers from selling assets at a loss just to claim a tax benefit while maintaining their investment position.
9. Capital Gains from Real Estate
When you sell real estate, the tax implications vary depending on whether the property is your principal residence or a rental/investment property.
Principal Residence:
- Gains are generally exempt from tax under the Principal Residence Exemption (PRE)
- You must still report the sale on your tax return (Schedule 3 and Form T2091(IND))
Rental or Investment Property:
- Gains are taxable as capital gains (50% inclusion)
- You may also face a recapture of capital cost allowance (CCA), which is fully taxable
10. Special Capital Gains Elections and Exemptions
Some special rules and elections may apply to reduce or defer capital gains tax:
- Lifetime Capital Gains Exemption (LCGE): For qualifying small business shares or farm/fishing property, individuals can claim up to $1,016,836 in tax-free gains (2025 indexed amount)
- Capital Gains Reserve: If you sell a property and receive payment over several years, you can defer reporting a portion of the gain using a reserve
11. Record-Keeping Requirements
The CRA requires you to keep detailed records to support capital gains reporting, including:
- Purchase and sale contracts
- Receipts and invoices
- Brokerage statements
- ACB calculations and expense details
These documents must be retained for at least 6 years from the end of the tax year to which they relate.
12. CRA Review and Audit Considerations
The CRA frequently audits capital gain transactions, especially high-value real estate or securities transactions. Ensure your reported information matches CRA slips (e.g., T5008) and market transactions.
Discrepancies may trigger a reassessment, interest, or penalties. Voluntary Disclosures can be used to correct unreported capital gains from previous years.
13. Final Thoughts
Capital gains taxation is a vital aspect of personal tax planning in Canada. Whether you’re selling investments, a second property, or shares in a private corporation, it’s important to understand how to calculate, report, and pay the associated taxes properly.
Accurate tracking of cost base, timely reporting on Schedule 3, and strategic use of capital losses can significantly affect your tax outcome. For complex cases or high-value transactions, working with a certified tax professional is highly recommended to avoid pitfalls and maximize available exemptions.
