With the dust settling on the 2024 changes to capital gains tax in Canada, it’s time to explore what 2025 holds for investors navigating this evolving landscape. Here’s what you need to know about capital gains, including the three most important changes in inclusion rates and exemption limits.
Key Takeaways:
- Capital gains tax is the tax individuals pay in Canada when they sell an asset or investment for more than the cost of acquiring it.
- The majority of the changes in the capital gains tax system involve an increase in capital gains tax inclusion rate from 50% to 66.7%, under certain circumstances.
- Some strategies to reduce or eliminate capital gains taxes are using the principal residence exemption, the lifetime capital gains exemption, and tax-sheltered accounts like TFSAs and RRSPs.
What are capital gains?
Capital is any financial asset or investment, such as stocks, bonds, and real estate, that is used to generate income. Depending on its current value and original acquisition cost, you may earn or lose money from selling the asset.
Simply put, capital gains refer to the profits made when an investment is sold for more than the cost of acquiring it. Some examples of capital properties that can incur capital gains when you sell them include:
- Securities (stocks, bonds, mutual funds)
- Land, buildings used in a business
- Cottages and antiques
Specifically, a capital gain occurs when selling an asset for more than its adjusted cost base (ACB). The ACB is the asset’s cost plus any expenses needed to acquire it, such as management and legal fees.
For example, say you purchased a stock for $1,000 and later sold it for $2,500. The profit you earned ($1,500) is the capital gain, almost twice its ACB ($1,000).
How are capital gains taxed in Canada?
In Canada, only half of the capital gains are taxed at the individual’s marginal tax rate. The rationale behind the 50% inclusion rate for capital gains is to provide preferential tax treatment compared to regular income, which is fully taxable at the individual’s marginal rate.
Specifically, a capital gain occurs when selling an asset for more than its adjusted cost base (ACB). The ACB is the asset’s cost plus any expenses needed to acquire it, such as management and legal fees. [vc_single_image image=”17813″]
What’s changing? 3 things to know about the new capital gains tax
On April 16, 2024, the federal government presented their 2024 Federal Budget plan, which introduced a few changes to the current capital gains taxation:
1. Hike in inclusion rate from 50% to 66.7% for individuals and corporations
For individuals, the inclusion rate will increase to 66.7% for capital gains above $250,000 each year. For capital gains below $250,000, the 50% inclusion rate still remains.
Meanwhile, corporations and trusts will be subject to the same increase for all capital gains, with no lower rate on the first $250,000. These changes will primarily affect those with significant capital gains income, and it is advisable to consult financial professionals for strategies for managing capital gains taxes.
2. Increase in the Lifetime Capital Gains Exemption (LCGE) to $1.25 million
For qualified individuals, the $1 million LCGE for sales of small business shares or assets for fishers and farmers will increase to $1.25 million and will be indexed to inflation starting in 2026.
3. A new Canada Entrepreneurs’ Incentive (CEI) for qualifying entrepreneurs
The new Canadian Entrepreneurs’ Incentive will reduce the inclusion rate to 33% on a lifetime maximum of $2 million in eligible capital gains. This program will start this 2025 and will be phased in over ten years in increments of $200,000.
How to calculate tax on capital gains
There are three things to consider when computing your capital gains taxes in Canada: proceeds of disposition, adjusted cost base (ACB), and expenses incurred to sell your property.
A capital gain or loss can be calculated by this formula:
Capital gain/loss = Proceeds of disposition – (Adjusted cost base + Outlays and expenses)
Net capital losses can be applied to offset taxable capital gains in previous or future years, influencing the overall taxable income.
- Proceeds of disposition: Proceeds of disposition are the amount earned or will be earned from selling an asset or capital property. It is usually based on the sale price of the property. In addition, proceeds of disposition may include the compensation received for a property that has been destroyed, expropriated, or stolen.
- Adjusted cost base (ACB): Adjusted cost base (ACB) is the actual or deemed cost of acquiring a property or asset, including any capital expenditures such as renovations or improvements. However, current expenses like maintenance and repair costs are excluded.
- Outlays and expenses: Outlays and expenses are types of expenses that are incurred when selling a capital property or asset. These include finders’ fees, commissions, brokers’ fees, legal fees, transfer taxes, and advertising costs.
Capital gains vs other investment income
Investment incomes come in different forms, with their own tax rules. Here is how capital gains differ from other investment income, such as interest and dividend income:
- Capital gains: Only 50% of the total realized capital gains are taxable in Canada. It is added to the taxable income and taxed at the individual’s marginal tax rate.
- Interest income: 100% of the interest income from bank accounts, guaranteed investment certificates (GICs), and bonds are taxed at the individual’s marginal income tax rate.
- Dividend income: Dividends are taxable income, which means they are subject to tax in the year they are received. In addition, dividends received by a Canadian resident from a Canadian business get a dividend tax credit.
It is important to note that when held in a registered account, such as a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP), the capital gains, interest income, and dividends received in these accounts are tax-free.
What’s the difference between capital gains and capital losses?
Capital gains and losses are two sides of the same coin. Whereas capital gains refer to the surplus from selling an investment for more than its ACB, capital loss occurs when the asset is sold for less than its ACB.
Capital losses can be used to offset capital gains, reducing the income tax you have to pay. Moreover, Canada Revenue Agency (CRA) taxes only realized capital gains, which means the asset has been sold. So, even if your investment’s value has increased, but the asset hasn’t been sold, you don’t have to pay tax on the capital gains.
Exemptions on capital gains tax
Sale of principal residence
The most common exemption to paying capital gains tax in Canada is the sale of a principal residence. According to the CRA, a principal residence is a designated housing unit that meets the following criteria:
- It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a cooperative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation.
- You own the property alone or jointly with another person.
- You, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year.
- You designate the property as your principal residence.
In addition, you can only designate one home as your family’s primary residence each year.
Lifetime Capital Gains Exemption (LCGE)
With the LCGE, otherwise known as the capital gains deduction limit, a cumulative amount exempts CRA-qualified farm or fishing properties (QFFP) and qualified business corporation shares (QSBCS) from capital gains taxes. Since it is cumulative, any qualified sale from either QFFP or QSBCS will count toward the limit.
The total capital gains deductions on gains from disposing of QFFP is $1,000,000. On the other hand, the limit for QSBCS is $971,190. Note that these are for the total capital gains and not the 50% capital gains taxable.
What is the $500,000 capital gains exemption in Canada?
The original LCGE, enacted in 1986, had a lifetime limit of $500,000. Currently, it is at $1.02 million and is indexed to inflation. In Budget 2024, however, the new LCGE is now up to $1.25 million for eligible capital gains.
Gifted Property
Transfers of capital property to your spouse or common-law partner will not incur any capital gain or loss because the recipient is considered to have bought the property for the same amount as its cost. However, the recipient will be liable to pay capital gains tax upon selling the property.
Charity Donations
Some capital property donated to a registered charity or other qualified people may not incur capital gains tax, provided they meet certain conditions. This includes a share of capital stock of a mutual fund corporation, a unit of a mutual fund trust, an interest in a related segregated fund trust, and a share on a designated stock exchange, among others.
Aside from the exemptions, there are also ways to reduce your capital gains tax:
- Use tax-sheltered accounts: When held in registered investment vehicles like TFSAs and RRSPs, any investment growth (interest, dividends, or capital gains) within these accounts is tax-free or tax-deferred.
- Tax-loss harvesting: In Canada, you can use a capital loss to offset your capital gains, reducing your payable taxes and minimizing the negative impact of losses on your portfolio. Capital losses can be used in the current year, the three preceding years, or in any future year as long as you make the necessary reporting of a capital gain or loss.
Mortgage Investment Corporations (MICs) and taxes
Mortgage Investment Corporations (MICs) are mortgage-backed investments that deliver steady income unrelated to publicly traded markets, helping investors boost their portfolio returns while reducing volatility.
As “flow-through” entities, MICs get tax breaks regarding capital gains and cash inflows remaining untaxable under the Income Tax Act, avoiding double taxation for investors. Plus, when held in registered accounts such as the TFSA, RRSP, or RESP, all investment growth and withdrawals remain tax-free, depending on the account.
Amur Capital: A trusted partner for MICs
Amur Capital’s MICs have enabled Canadian investors to earn stable returns with mortgage investing. Each of the mortgage funds minimizes risk by investing in mortgages with varying loan-to-value (LTV), mortgage sizes, and maturity compositions across thriving real estate locations in Alberta, British Columbia, and Ontario.
These funds employ different investing strategies, focusing on conservative, balanced, and high-growth goals:
- Amur Capital Conservative Income Fund (ACCIF) provides investors with stability in returns and reliable growth in value, with a focus on residential first mortgages.
- Amur Capital Income Fund (ACIF) offers investors a blend of stability and income growth, focusing on first and second home mortgages.
- Amur Capital High Yield Fund (ACHYF) is for investors willing to accept an increased level of risk, focusing on higher ratio mortgages over shorter terms.
Amur Capital’s MICs are eligible for registered and non-registered accounts. With a registered account such as a TFSA or RRSP, you can maximize tax-free growth on your investment.
Contact our Investor Relations to get started today. 
FAQs
What is an example of capital gain?
The new capital gains tax in Canada involves a rise in the inclusion rate from 50% to 66.7% for individuals with capital gains of $250,000 or more each year. For corporations, the same increase is seen for all capital gains, with no lower rate below $250,000.
Is there still a lifetime capital gains exemption in Canada?
Yes, the federal government retained the lifetime capital gains exemption (LCGE) and increased the limit to $1.25 million.
How much capital gains do I pay on $100,000?
That depends on your personal marginal tax rate and where you are in Canada. The current capital gains tax rate is 50%. So, a capital gain of $100,000 will result in a taxable capital gain of $50,000. This amount will be added to your annual income and be taxed at your marginal tax rate based on your tax bracket.
How to avoid capital gains tax in Canada?
Principal residence exemption, lifetime capital gains exemption, and charity donation are ways to avoid paying capital gains tax in Canada.
