If you think taxes couldn’t get any more interesting, think again—the new capital gains tax in Canada is here, and it's worth paying attention to. Whether you’re selling a property or ensuring your wealth, this change could alter the way you look at your realized gains. To help you learn about these changes, we’ll discuss the basics of this type of tax, the reforms it’s currently undergoing, and its effects on Canadian taxpayers.
What is capital gains tax in Canada and how does it work?
Capital gains tax is levied when an individual or a corporation sells a capital property and a a gain is realized; basically, when it’s sold more than what it’s bought for. The tax rate for this is called the capital gains tax inclusion rate, which is applied only on the gain (and not on the whole selling price).
Properties subject to capital gains tax do not only include real properties, but also securities or shares of a corporation. Also, partners will also be liable for capital gains when their partnership realizes a gain after disposing of a property that it owns.
Calculating capital gains tax
As this tax only applies if you realize a capital gain, the first step is to determine whether you have a gain or not (i.e. loss). The computation for capital gains is as follows:
Proceeds of disposition – (Adjusted cost base + outlays and expenses on disposition) = Capital gain or loss
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Proceeds of disposition: the value of the property at the time of the sale; may be viewed as the selling price or the amount earned from the transaction
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Adjusted cost base (ACB): the value of the property at the time it was acquired; the price when it was purchased for in the past
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Outlays and expenses on disposition: expenses incurred to sell the property; examples are transfer tax, commissions, and capital expenses
After determining that you realized a gain, the next step is to apply the capital gains tax inclusion rate to get the taxable capital gain. Note that the inclusion rate is not applied to the whole proceeds of the disposition, but only on the realized capital gains.
The prevailing rate right now is 50 percent or one-half of the of the realized gains, after the 66.6 percent or two-thirds rate was deferred by the government until January 1, 2026. Thus, only 50 percent of the realized capital gains will be taxed and shall be reported through your income tax and benefit return. These taxable capital gains will then be subject to ordinary income tax rates.
Here’s a video that explains how capital gains work in Canada, and how it’s charged:
Learn more about capital gains tax by consulting the best personal tax planning and estate lawyers in Canada as ranked by Lexpert.
Sample calculation of capital gains tax
For example, an individual sells a property for $500,000. They originally purchased the property for $300,000. Computing the capital gain on selling the property would be:
$500,000 – $300,000 = $200,000 (capital gain)
Applying the capital gains tax inclusion rate, only 50 percent or one-half of the $200,000 is taxable:
$200,000 x 50% = $100,000 (taxable capital gain)
The individual would then report this $100,000 taxable capital gain in their income tax and benefit return. In other words, the $100,000 taxable capital gain forms part of that individual’s taxable income, subject to the applicable income tax rate.
What is the new capital gains tax in Canada?
Working on the existing capital gains tax regime, there were recent changes on how these taxes worked in 2024. Originally, these new rules are effective on taxable transactions with capital gains realized on or after June 25, 2024. However, the Department of Finance Canada (DFC) announced on January 31, 2025 that its new effective date would be moved to January 1, 2026.
The following are rules on the proposed or new capital gains tax:
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increase of capital gains tax inclusion rate: previously, only 50 percent (one-half) of the realized gains are taxed under the capital gains tax; once effective, 66.6 percent (two-thirds) of the realized gains will be taxable for capital gains
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inclusion rate for individuals: the 66.6 percent apply differently for individuals, such as that the 50 percent rate still applies on the first $250,000 realized gain, but the 66.6 percent rate will apply for realized gain exceeding $250,000
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inclusion rate for non-individuals: there’s no separate rates for the first $250,000 and those above; this means that non-individuals (businesses, corporations, and trusts) must use the 66.6 percent inclusion rate for whatever capital gain their transaction will realize
Here’s a video that explains these rules on new capital gains tax, and some insights from experts when these changes were announced:
For more info about the rules on the new capital gains tax, you can reach out to the Lexpert-ranked best law firms for personal tax planning and estate in Canada.
Deferred application on the new capital gains tax
While the proposed or new capital gains tax was initially planned to be implemented on transactions starting June 25, 2024, its effectivity was eventually deferred by the CRA to January 1, 2026. This comes after the January 31, 2025 announcement by the DFC of the deferral.
As such, transactions from June 25, 2024 to January 1, 2026 will be using the old capital gains tax inclusion rate, which is 50 percent of the realized gains. With this, the government will be proposing a law, whose effective date is January 1, 2026, reflecting the new capital gains inclusion rate (66.6 percent).
This also affects the effectivity date of some proposed capital gains exemptions, although there are some of these exemptions that remain in force since June 25, 2024.
Maintained and new exemptions to capital gains tax
There are existing exemptions that are offered by the government to minimize the impact of capital gains tax on taxpayers. And with the impending increase of the capital gains inclusion rate, there are additional exemptions offered by the government. Some of these are already implemented, and others will be implemented on January 1, 2026.
Here are the exemptions to capital gains tax in Canada, along with its implementing dates:
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Annual threshold of $250,000: While this annual threshold exists before the new capital gains tax was proposed, it will now increase starting January 1, 2026. Aside from retaining the $250,000 annual threshold for individuals, the sale of a secondary property will become eligible for this threshold. Note that individuals cannot share this $250,000 annual threshold with a corporation that they own, as this threshold only applies to individuals.
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Capital gains tax-free transactions: There are two exempt transactions where no capital gains tax will be levied: the sale of a principal residence and the sale of personal-use property. To be tax-exempt, the property must be the principal residence for all the years that it was owned, does not meet the definition of a “flipped property,” and no other property is designated as the principal residence. The new rules on capital gains tax do not affect these exemptions.
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Lifetime Capital Gains Exemption (LCGE): Even though the new capital gains tax was deferred, the implementation date (June 25, 2024) to increase the LCGE did not change. Included under the LCGE are dispositions of a qualified farm or fishing property (QFFP) or qualified small business corporation shares (QSBCS). From the previous $1,016,836, it has increased to $1,250,000 for dispositions after June 24, 2024.
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Canadian Entrepreneurs’ Incentive (CEI): Starting in 2025, a new exemption called the CEI will be implemented. As a deduction from taxable income, it will reduce the capital gains tax inclusion rate for eligible transactions. In 2025, the maximum amount of the incentive will be $400,000, which will increase by the same amount every year; by 2029, the incentive will reach $2 million. The CEI only applies to individuals who are engaged in business on a regular, continuous, and substantial basis for at least three years.
How does the new capital gains tax impact estate planning and trusts?
Aside from affecting the corporate tax on capital gains, these new capital gains tax will influence how estate planning and trusts operate in Canada. Although the new rules will be implemented on January 1, 2026, there are also other ways to minimize the impact of capital gains tax, both on individuals and corporations.
Beneficial for individuals, but not for trusts
A notable change in the new capital gains tax, although deferred, is the distinction of the application of the 66.6 percent new capital gains tax on individuals and businesses. Because of this distinction, it would seem more beneficial for individuals to own and eventually sell their properties.
However, individuals must also be wary that once these deferred new rules take effect, the old capital gains tax inclusion rate of 50 percent will only apply to the first $250,000 realized gain. A classic example of this is when an individual owns a cottage, who wants to sell it in the future.
Before selling an asset, questions must be asked, like when should it be sold (before or after the new capital gains tax), and would its value be more than $250,000 at the time of the sale.
Larger capital gains tax at death
Because of how capital gains tax works when someone dies, estate planning will have to be applied to minimize the impact of these taxes. As assets will be deemed disposed at the time of death for capital gains tax purposes, a larger inclusion rate will surely be a large blow on the final taxpayer—the estate and the heirs.
As such, individuals may have to consult with their tax planning and estate lawyers about the future changes of this new capital gains tax. This is true both for those who have and who don’t have an estate plan yet in place.
Effect of new capital gains tax on trusts
Depending on how a trust is structured and its beneficiary, the new capital gains tax will be making its rounds once it’s implemented. Because of the higher inclusion rate, it’s best to strategize how trusts work, so that the beneficiaries will not have to pay a hefty capital gains tax.
For instance, a trust that is passed to the beneficiary can take advantage of the $250,000 benefit if the gain is passed to them during the taxable year it was earned.
The new capital gains tax: reforms to keep tabs on
As it gets more interesting by the year, the new capital gains tax in Canada will affect both individuals and businesses. While these changes will be deferred until 2026, taxpayers should be aware of how these may affect future property sales, especially in terms of estate planning and trust management. In any case, it’s important to prepare for these changes by talking to a tax planning and estate lawyer.
More legal resources and articles on other practice areas, other than the new capital gains tax, are found in our Legal FAQs page.