How capital gains are taxed

Start with the part that has caused two years of confusion, because it was settled only recently.

The capital gains inclusion rate is one-half. Budget 2024 proposed raising it to two-thirds on gains above $250,000 a year. That was deferred in January 2025, and then cancelled — the Department of Finance release of September 15, 2026 lists "cancelling the proposed increase in the capital gains inclusion rate" among the measures taken.

It never took effect. But a great deal was written while it looked as though it would, and most of it is still online. If you are checking a number against a search result, check its date first.

What a capital gain is

You have a capital gain when you sell — or are considered to have sold — a capital property for more than what it cost you, including the cost of selling it.

The calculation is subtraction:

Proceeds of disposition − (Adjusted cost base + Outlays and expenses) = Capital gain

Proceeds of disposition is what you got for it. Adjusted cost base is what it cost, adjusted for certain things over the years. Outlays and expenses are the costs of selling — commission, legal fees.

The CRA's own example: $6,500 of proceeds, a $4,000 adjusted cost base and $60 of selling costs give a capital gain of $2,440.

What one-half actually means

Only half the gain is added to your income. The other half is not taxed at all.

So a $50,000 gain adds $25,000 to taxable income. That $25,000 is then taxed at ordinary rates, exactly like salary — there is no separate capital gains rate in Canada.

Roughly half your marginal rate, but not exactly

Because half is excluded, the effective tax on the whole gain lands near half your marginal rate. Near, not on.

Someone with $95,000 of other income in Ontario has a marginal rate of 29.65%. Half of that is 14.82%. But a $50,000 gain is actually taxed at an effective 15.64% — because the $25,000 that gets added pushes part of the gain into the next bracket.

The larger the gain, the further apart those two numbers drift. On a $300,000 gain at the same income, the effective rate is 19.13%, not 14.82%.

Which matters if you are planning around a large disposition: halving your marginal rate is a fine mental shortcut for a small gain and increasingly wrong for a big one.

What isn't taxed this way

Your principal residence. Where a home meets the conditions, you generally do not pay tax on the gain at all. The exception is the flipped property rule: a residential property owned for fewer than 365 consecutive days before disposition is fully taxable as business income, not as a capital gain, unless the sale was because of a specified life event.

Anything inside a TFSA. No tax, ever, on gains inside it — which is the TFSA's whole point.

Anything inside an RRSP or RRIF. No capital gains tax inside the account. But a withdrawal is fully taxable as income, not as a capital gain — so the half-inclusion never applies to it. An investment that would have been taxed favourably outside a registered account is taxed at full rates coming out of one, which is a genuine trade-off rather than a flaw.

Qualifying small business shares and farm or fishing property. The Lifetime Capital Gains Exemption is $1,250,000 for dispositions of qualifying property, which shelters a maximum capital gains deduction of $625,000.

Capital losses

A capital loss is the same subtraction in the other direction, and it offsets capital gains. If your allowable capital losses for the year exceed your taxable capital gains, the excess does not simply vanish — but it cannot generally be applied against ordinary income either.

That asymmetry is worth knowing before assuming a loss on one holding cancels tax on a salary.

Where this catches people

A gain is triggered by disposition, not by cashing out. Switching from one fund to another is a disposition. So is being deemed to have sold something — which happens at death, and when property changes use.

Nothing is withheld. Unlike a paycheque, no tax comes off a capital gain at source. The bill arrives at filing time, and can be large enough to require instalments the following year.

Reinvesting does not defer it. Selling at a gain and immediately buying something else is still a disposition. The gain is realised regardless of what the money did next.

Sources (Government of Canada)

Read directly on September 21, 2026:

• Capital Gains – 2025 (T4037) — the one-half inclusion rate, the definition of a capital gain and the proceeds-minus-ACB-minus-outlays calculation with the $2,440 worked example, the $1,250,000 Lifetime Capital Gains Exemption and the $625,000 maximum deduction, the principal residence exemption, and the 365-day flipped property rule.
• Government of Canada introduces new Productivity Mega Deduction (September 15, 2026) — "cancelling the proposed increase in the capital gains inclusion rate".
• Deferral in implementation of change to capital gains inclusion rate (January 2025) — the deferral that preceded the cancellation, and the $250,000 annual threshold that was proposed alongside it.
• Line 12700 – Capital gains — where taxable capital gains are reported.
• Current year tax rates and income brackets — the 2026 federal and Ontario brackets used in the calculator.

The inclusion rate has been one-half throughout, notwithstanding two years of proposals. Bracket rates change every January.