Capital Gains Inclusion Rate

Definition

A capital gain arises when capital property is disposed of for more than its adjusted cost base (ACB). Only the "taxable capital gain", equal to the inclusion rate times the actual gain, is added to income under ITA s.38. Capital losses have a parallel allowable-loss treatment. The rate has been 50% for individuals and CCPCs for most of the past two decades. A 2024 federal proposal would have moved the rate to 66⅔% on gains above $250,000 per individual per year and on all corporate gains. As of the date above, taxpayers and advisors should verify the current legislative status before filing or planning a disposition, because the measure has been subject to delays and revisions.

Key rules

• Standard individual and CCPC inclusion rate: 50%. A $100,000 gain adds $50,000 to taxable income.
• Allowable capital losses offset only taxable capital gains of the current year, the prior three years (carryback), or any future year (carryforward).
• The inclusion rate at the time of disposition governs, not the rate at the time of acquisition.
• Capital gains on the sale of a principal residence are fully exempt under the principal residence exemption (ITA s.40(2)(b)), provided all years of ownership are designated and the annual T2091 designation is filed.
• Lifetime Capital Gains Exemption (LCGE) shelters qualifying small business corporation shares and qualified farm or fishing property; the LCGE limit is indexed (over $1,016,836 for 2024 and increasing).
• Gains realized inside a TFSA are fully tax-free. Gains inside an RRSP are deferred.
• Identical-property rules (average cost) apply to determine ACB.

Example

An Alberta resident sells 500 shares of a public company on July 1, 2026 for $60,000. The shares were purchased in 2019 for $25,000. Selling commissions were $250.

Proceeds                    $60,000
Less: ACB                  ($25,000)
Less: Selling costs           ($250)
Capital gain                $34,750
Inclusion rate x 50%
Taxable capital gain        $17,375

The $17,375 is added to 2026 taxable income on Line 12700. At a 36% combined marginal rate, the approximate tax cost is $6,255 (an effective rate of 18% on the actual gain).

Common mistakes

• Forgetting to adjust ACB for historical corporate actions, stock splits, and reinvested distributions. Incorrect ACB is the most common capital-gains error.
• Claiming the principal residence exemption without filing Form T2091.
• Using the realized loss from a taxable investment to offset ordinary income. Capital losses only offset capital gains.
• Ignoring superficial loss rules (s.54): selling at a loss and re-buying the same security within 30 days denies the loss.
• Treating trading inside a TFSA or RRSP as a way to realize the gain "for purposes of the inclusion rate". It is neither taxable nor a loss for tax purposes.

Related concepts

Capital gains sit inside the computation of income on the T1 return and are taxed at the filer's marginal rate in the federal bracket schedule. In owner-manager planning they compete with dividend extraction as a way to realize CCPC value.