Capital Gains in Canada: What Every Investor Needs to Know

The Basic Mechanics

A capital gain occurs when you sell a capital property (stocks, ETFs, real estate, mutual funds) for more than you paid for it. In Canada, only a portion of your capital gain is included in taxable income — this is called the inclusion rate.

As of 2024, the inclusion rate is 1/2 (50%) for individuals on gains up to $250,000 in a year, and 2/3 (66.67%) for gains exceeding $250,000 in a year, and for corporations and trusts on all gains. This change was introduced in the 2024 federal budget and applies to dispositions after June 24, 2024.

Adjusted Cost Base (ACB) — The Part That Trips Everyone Up

Your capital gain is calculated as: Proceeds of Disposition − Adjusted Cost Base − Selling Costs. The ACB is what you paid for the investment — but it's not always straightforward.

ACB gets complicated when:

• You've purchased the same security multiple times at different prices (ACB is averaged)
• You've received return of capital distributions from ETFs or mutual funds (reduces ACB)
• You've reinvested distributions through a DRIP (increases ACB)
• You've had stock splits, mergers, or spinoffs

Many investors don't track ACB properly and end up either overpaying tax (because their ACB is understated) or underpaying (and facing a CRA reassessment). Your broker's cost basis figure is often wrong — especially for older accounts or securities held across multiple brokerages.

What Goes on Schedule 3

All capital dispositions for the year are reported on Schedule 3 of your T1 return. This includes:

• Stocks, bonds, and ETFs sold in non-registered accounts
• Mutual fund redemptions
• Sale of real estate (other than your principal residence)
• Cryptocurrency dispositions
• Options that were exercised or expired

Each disposition is reported separately — proceeds, ACB, and gain or loss. Capital losses can offset capital gains in the current year, the three preceding years, or be carried forward indefinitely.

T3 and T5 Slips — What They Mean

T5 slips report investment income: interest, dividends (eligible and non-eligible), and foreign income from your non-registered accounts. These don't report capital gains directly.

T3 slips come from trusts — mutual funds, ETFs structured as trusts, and REITs. T3s can report capital gains distributions, return of capital, and various types of income. The capital gains on a T3 are already realized by the fund and allocated to you — you report them on Schedule 3 even if you didn't sell anything.

Return of capital reported on a T3 is not taxable in the year received — but it reduces your ACB, which increases your future capital gain when you eventually sell. Ignoring return of capital adjustments leads to overstating your ACB and underpaying tax at disposition.

The Principal Residence Exemption

The gain on the sale of your principal residence is generally tax-free under the Principal Residence Exemption (PRE). To qualify, you must designate the property as your principal residence for each year you want to shelter. You can only designate one property per year per family unit.

If you've ever rented out your home or used it partially for business, the PRE may not shelter the full gain. A change-of-use election (s. 45(2)) can defer the deemed disposition when you convert a personal property to a rental — but it must be filed on time.

Cryptocurrency

CRA treats cryptocurrency as a capital property, not currency. Every time you sell, trade, or use crypto to purchase goods or services, you have a disposition. Mining income is business income. Staking rewards are generally income when received. ACB tracking across multiple wallets and exchanges is complex — get it right before CRA asks.

Capital Losses — Use Them

Net capital losses can be applied against capital gains in the current year. If losses exceed gains, you can carry them back up to three years (to recover tax paid on prior gains) or carry them forward indefinitely. Don't let losses expire without considering whether to carry them back.