What Is the Inclusion Rate for Capital Gains Tax?

The capital gains tax inclusion rate in Canada is 50%, so only half of any profit you make on the sale of an investment or property is added to your taxable income. That rate applies to individuals, corporations, and most trusts. A proposed increase to two-thirds, announced in Budget 2024, was cancelled by Prime Minister Mark Carney on March 21, 2025, so the one-half rate stays in place for 2026 and beyond.¹

What the 50% Inclusion Rate Actually Does

Section 38 of the Income Tax Act sets a taxpayer’s taxable capital gain at one-half of the actual gain from selling property.² Sell shares for a $100,000 profit and only $50,000 gets added to your income for the year.

The inclusion rate is not itself a tax rate. It’s a filter that decides how much of your gain enters the tax system at all. Once that taxable half is inside your income, it is taxed at whatever federal and provincial marginal rates apply to your bracket, the same way employment income is taxed. Two people with the same $100,000 gain can owe very different amounts of tax depending on their other income for the year.

What Happened to the Proposed Two-Thirds Rate

Budget 2024 proposed raising the inclusion rate from one-half to two-thirds for corporations and trusts on all capital gains, and for individuals on annual gains above $250,000. The change was originally set for June 25, 2024, then deferred to January 1, 2026, and never took effect.³

On March 21, 2025, the government cancelled the proposal outright.¹ There is no $250,000 individual threshold, no two-thirds rate, and no different rate for corporations. The Section 38 one-half rate applies across the board, just as it did before Budget 2024. Any planning built around the higher rate can be unwound.

Which Assets the Rate Applies To

Any property you sell for more than you paid can produce a capital gain. The Canada Revenue Agency’s Schedule 3 sorts dispositions into categories including publicly traded shares and mutual fund units, bonds and debentures, real estate and depreciable property, crypto-assets, and personal-use property.⁴ Cottages, rental properties, and commercial real estate all fall inside these rules.

Investments held inside registered accounts such as RRSPs, TFSAs, and RESPs are sheltered from capital gains tax entirely. The 50% inclusion rate only matters for assets held outside those accounts. Some people are caught out when they sell holdings they assumed were tax-sheltered but that were actually sitting in a regular non-registered brokerage account.

Exemptions That Cut or Erase the Taxable Half

Principal Residence

The largest exemption most Canadians use is on their home. Section 40 of the Income Tax Act reduces or eliminates the gain on a property you lived in, through a formula based on how many years you designated it as your principal residence versus how many years you owned it.⁵ If you lived in the home the entire time you owned it and designated every year, the exemption typically wipes out the whole gain.

The property has to be a housing unit ordinarily inhabited during the year by you, your spouse or common-law partner, or your child. Only one property per family unit can be designated as the principal residence for any given tax year.⁶ Owners of both a city home and a cottage have to decide which one to designate for each year, and the choice affects the tax bill on whichever they sell first without the full designation.

Lifetime Capital Gains Exemption

Owners of qualifying small business corporation shares and qualified farm or fishing property can use the Lifetime Capital Gains Exemption. The CRA sets the LCGE at $1,250,000 for dispositions of qualifying property under proposed changes, which produces a maximum capital gains deduction of $625,000 at the 50% inclusion rate.⁷ The amount is indexed to inflation.

The LCGE is claimed on the personal tax return, not at the corporate level, and the shares have to meet specific tests at the time of sale, including that the corporation used substantially all of its assets in an active business carried on primarily in Canada. Failing even one qualifying test means the exemption is unavailable and the 50% inclusion rate applies to the entire gain.

Running the Calculation

The math has four steps. Start with proceeds of disposition, the amount you received (or are treated as having received) for the property. Subtract the adjusted cost base, which is your original purchase price plus capital expenditures such as additions and improvements. Subtract any outlays and expenses to sell, such as legal fees or brokerage commissions.⁸ The result is your capital gain. Multiply by 50% to get your taxable capital gain.

One detail catches people out: maintenance and repair costs cannot be added to the adjusted cost base. Only capital expenditures that add lasting value qualify. Fixing a leaky roof is a repair. Adding a second storey is an improvement. A higher adjusted cost base means a smaller gain, and a smaller gain means less tax.

Report the full calculation on Schedule 3, entering the year of acquisition, proceeds, adjusted cost base, and outlays for each property sold. The taxable capital gain flows to line 12700 of your return.⁴

Capital Losses Use the Same 50%

The inclusion rate cuts losses too. Sell an asset for less than its adjusted cost base and your allowable capital loss is 50% of that loss.² An allowable capital loss can only offset taxable capital gains, not employment or business income. Unused losses carry back three years or forward indefinitely against taxable capital gains in those years.

If you already have gains earlier in the year, selling a losing position before December 31 reduces your net taxable capital gains for that year. A common mistake is to assume a full capital loss can be deducted against salary. It cannot, except in the narrow case of an allowable business investment loss on shares or debt of a qualifying small business corporation.

Corporations and Trusts

After the cancellation, corporations and most trusts apply the same 50% inclusion rate as individuals.¹ A corporation with a $200,000 capital gain includes $100,000 in its income. For Canadian-controlled private corporations, some of the corporate tax paid on capital gains is refunded when the company later pays taxable dividends, which is designed to keep the total tax roughly equivalent whether the gain is earned personally or through the corporation.

When the Taxable Half Gets Reported Can Shift

Two rules change the timing rather than the 50% share.

At death, the CRA treats a person as having sold all their capital property at fair market value immediately before death, even though no actual sale happened. This deemed disposition can produce a large capital gain on the final return.⁹ Property transferred to a surviving spouse or common-law partner can roll over at the deceased’s adjusted cost base, deferring the gain until that spouse sells or is themselves deemed to have disposed of it. The spousal rollover applies automatically unless the estate’s legal representative elects otherwise.

During life, if you sell property but do not collect the full payment in the year of sale, a capital gains reserve lets you spread the taxable gain over multiple years to match the proceeds you actually receive. The maximum reserve period is generally four years, so the whole gain must be reported across five tax years.¹⁰ A longer nine-year reserve is available for transfers of family farm or fishing property and qualifying small business corporation shares to your child, as well as certain intergenerational business transfers. The reserve claimed in any year cannot exceed the reserve claimed the previous year, so a small reserve upfront cannot be backloaded later.

1
Prime Minister of Canada. Prime Minister Mark Carney Cancels Proposed Capital Gains Tax Increase
2
Justice Laws Website. Income Tax Act – Section 38
3
Department of Finance Canada. Government of Canada Announces Deferral in Implementation of Change to Capital Gains Inclusion Rate
4
Canada Revenue Agency. Completing Schedule 3
5
Justice Laws Website. Income Tax Act – Section 40
6
Justice Laws Website. Income Tax Act – Section 54
7
Canada Revenue Agency. Line 25400 – Capital Gains Deduction
8
Canada Revenue Agency. Definitions for Capital Gains
9
Canada Revenue Agency. Taxable Capital Gains on Property, Investments, and Belongings
10
Canada Revenue Agency. Claiming a Capital Gains Reserve