The CRA’s Guide T4037, Capital Gains, sets out how to calculate the gain or loss on property you sold during the year, how much of it is taxable, and where to report it. Only 50% of a capital gain is included in your taxable income, and that half is reported on Schedule 3 and carried to Line 12700 of your T1 return.1Canada Revenue Agency. Capital Gains 2025 A proposed increase to a two-thirds inclusion rate was cancelled in March 2025, so the 50% figure is what applies to your 2025 filing.2Prime Minister of Canada. Prime Minister Carney Cancels Proposed Capital Gains Tax Increase
How to Calculate the Gain or Loss
Start with proceeds of disposition, usually the sale price. Subtract the adjusted cost base (ACB), which is what you originally paid plus acquisition costs and any capital improvements. Then subtract outlays and expenses, such as commissions and legal fees paid to make the sale. What remains is your capital gain or capital loss.3Justice Laws Website. Income Tax Act – Section 40
Half of that figure is the taxable capital gain. Sell shares for a $10,000 profit and $5,000 is added to your income for the year, taxed at your marginal rate.
The ACB is where most errors happen. Every capital improvement to a property, like a new roof on a rental building, increases the cost base and reduces the eventual gain. For securities, the ACB is the average cost of all identical shares or units you hold, recalculated every time you buy more, including through reinvested distributions. Clean records of every purchase, distribution, and improvement receipt are the single most effective way to avoid overpaying tax or losing an argument with a CRA reviewer.
What Counts as a Disposition
Under the Income Tax Act, capital property covers depreciable assets like rental buildings and any other property whose sale produces a capital gain or loss rather than business income.4Justice Laws Website. Income Tax Act – Section 54 In practice, that means stocks, bonds, and mutual fund units held outside registered accounts, along with real estate such as rental properties and vacation homes.
A taxable event is triggered by disposition, and the CRA’s definition reaches beyond a straight sale. Gifting property, converting it to a different use, or exchanging it all count, and the transaction is treated as taking place at fair market value even when no money changes hands.
Personal-use property (furniture, vehicles, a boat) is subject to a $1,000 floor: both the ACB and the proceeds are deemed to be at least $1,000. If both figures fall at or below that threshold, there is no gain or loss to report. When you sell above $1,000, you report any gain, but losses on personal-use property generally cannot be deducted.1Canada Revenue Agency. Capital Gains 2025
Deemed Dispositions at Death or Emigration
Two situations create a disposition without any sale. At death, the deceased is treated as having sold all capital property at fair market value immediately before passing, and the resulting gains go on the final return. If you emigrate, you are deemed to have disposed of certain property at fair market value on the date you ceased to be a resident. You report the gain on Form T1243 with Schedule 3, and if the total fair market value of your property exceeded $25,000 when you left, you must also file Form T1161. The penalty for filing T1161 late is $25 per day, minimum $100 and maximum $2,500.5Canada Revenue Agency. Dispositions of Property for Emigrants of Canada
The Superficial Loss Rule
Selling an investment at a loss while you or an affiliated person (a spouse, for example) buys the same or identical property within 30 calendar days before or after the sale and still holds it 30 days later means the loss is denied. This is a superficial loss. The disallowed amount is added to the ACB of the replacement property, so you recover the benefit when that replacement is eventually sold.6Canada Revenue Agency. Capital Losses This catches people who try to harvest a December tax loss and immediately buy back the same stock.
Reporting on Schedule 3 and Line 12700
Schedule 3, Capital Gains (or Losses), is where the calculation is set out. For every property you sold, you enter a description, the acquisition date, the proceeds, the ACB, and outlays or expenses. The form is divided into sections for flipped property (housing units held less than 365 consecutive days), principal residence dispositions, and other dispositions broken out by type, including QSBC shares, qualified farm or fishing property, publicly traded shares and mutual fund units, real estate, bonds, crypto-assets, and personal-use property.7Canada Revenue Agency. Completing Schedule 3
If you received T3 slips showing capital gains in Box 21 or T5 slips with capital gains dividends in Box 18, those amounts go into a separate part of Schedule 3 rather than into the transaction-by-transaction section. You report them even if the distributions were automatically reinvested into more fund units.
The taxable capital gain from Schedule 3 flows to Line 12700 of your T1 return.8Canada Revenue Agency. Line 12700 Taxable Capital Gains You must file a return to report the disposition even if the gain is fully offset by losses or an exemption.9Canada Revenue Agency. Calculating and Reporting Your Capital Gains and Losses CRA-certified tax software handles most of Schedule 3 automatically once you enter each transaction, and NETFILE gives faster processing and immediate confirmation of receipt.10Canada Revenue Agency. Tax Software for Filing Personal Taxes
Exemptions and Deferrals That Reduce the Gain
Principal Residence Exemption
The principal residence exemption can eliminate the entire gain on the sale of your home if the property was your principal residence for every year you owned it.11Canada Revenue Agency. Principal Residence A principal residence is a housing unit ordinarily inhabited during the year by you, your spouse, or your child. Only one property per family unit can be designated for any given tax year, so families who own both a house and a cottage need to think about which years to assign to which property.
Even when the exemption covers the full gain, you must report the sale. Since 2016, you have to report the disposition on Schedule 3 and complete Form T2091 to designate the property. Skip this step and the CRA can deny the exemption entirely, though it may accept a late designation with a possible penalty.12Canada Revenue Agency. Income Tax Folio S1-F3-C2 Principal Residence A fully exempt home sale still creates a filing obligation.
If the property was not your principal residence for every year of ownership, the gain is partially exempt. The formula in Section 40(2)(b) uses one plus the number of designated years divided by the total years of ownership.3Justice Laws Website. Income Tax Act – Section 40 The extra year in the numerator helps families transitioning between residences without losing a year of coverage.
Lifetime Capital Gains Exemption
The lifetime capital gains exemption (LCGE) shelters gains on qualifying property up to a cumulative lifetime limit. For 2025, that limit is $1,250,000, and it is indexed to inflation each year.13Canada Revenue Agency. Line 25400 Capital Gains Deduction It applies to qualified small business corporation shares and to qualified farm or fishing property, each of which has holding-period and active-use tests you should confirm before claiming.
Claim the deduction on Line 25400 of your return. It is not applied automatically. You must be a Canadian resident throughout the entire tax year, and you file Form T657 to calculate the deduction.13Canada Revenue Agency. Line 25400 Capital Gains Deduction
A separate proposed measure, the Canadian Entrepreneurs’ Incentive, would reduce the inclusion rate to one-third on up to $2 million of eligible gains over a lifetime for qualifying founders, phased in at $200,000 per year starting in 2025 and reaching $2 million by 2034.14Department of Finance Canada. The New Canadian Entrepreneurs Incentive Because it was part of the same budget package as the cancelled inclusion rate increase, confirm its status with the CRA or a tax professional before relying on it.
Capital Gains Reserve
When you sell property but will not receive the full price until a future year, such as under seller financing, you can spread the gain over time by claiming a capital gains reserve. You report only the portion of the gain that matches proceeds actually received.15Canada Revenue Agency. Claiming a Capital Gains Reserve For most property the maximum reserve period is four years, meaning the full gain must come into income over no more than five tax years. Certain transfers of family farm, fishing, or QSBC property to a child or grandchild qualify for a nine-year reserve, stretching inclusion over up to ten years. The reserve you claim in a later year cannot exceed what you claimed the year before, so you cannot backload the gain into the final year.
Using Capital Losses
A capital loss arises when you sell property for less than its ACB plus selling costs. Losses can only offset capital gains; they cannot reduce employment income, interest, or other income types.6Canada Revenue Agency. Capital Losses
If losses exceed gains for the year, the net capital loss can be carried back to any of the three preceding tax years or carried forward indefinitely.6Canada Revenue Agency. Capital Losses To carry a loss back, file Form T1A asking for a reassessment of the earlier year. Unused losses cost nothing to hold, and they are worth the most in a year when you have a large gain to shelter.
Records You Need to Keep
You must keep records and supporting documents for six years from the end of the last tax year they relate to.16Canada Revenue Agency. Keeping Records For capital property, the practical requirement is longer, because you need to prove your ACB whenever you sell. Buy an investment in 2010 and sell it in 2026 and you need records going back to 2010. Trade confirmations, closing statements, and improvement receipts should be held for the entire ownership period.
If you cannot substantiate your cost base during a CRA review, the CRA may reduce it, which inflates the gain and the tax. Organized files also make Schedule 3 easier to complete accurately when you hold multiple investments with reinvested distributions that keep shifting the average cost.
Penalties for Errors and Omissions
Two separate penalties can apply to capital gains reporting problems. The repeated failure to report income penalty is triggered when you omit $500 or more from your return and also failed to report income in any of the three preceding tax years. It is the lesser of 10% of the unreported amount or 50% of the understated tax on that omission.17Canada Revenue Agency. False Reporting or Repeated Failure to Report Income
The gross negligence penalty applies to false statements or omissions made knowingly or in circumstances amounting to gross negligence, and it is the greater of $100 or 50% of the understated tax attributable to the false statement.18Justice Laws Website. Income Tax Act – Section 163 Compound daily interest at a prescribed rate, adjusted quarterly, runs on any unpaid balance on top of either penalty. Getting Schedule 3 right the first time costs less than fixing it later.