Capital gains tax is one of the most significant and often misunderstood areas of Canadian taxation. Whether you are selling investments, real estate, a business, or other assets, understanding how capital gains are taxed — and how to minimize that tax — is essential for effective financial planning. At BOMCAS Canada, our Professional Tax Accountants and tax planning specialists help clients across Edmonton and all of Canada navigate capital gains tax with confidence.
What Is a Capital Gain?
A capital gain occurs when you sell a capital property for more than its adjusted cost base (ACB). The ACB is generally the original purchase price plus any costs incurred to acquire the property (such as commissions or legal fees). The difference between the proceeds of disposition and the ACB is your capital gain (or capital loss if the proceeds are less than the ACB).
Capital property includes:
- Stocks, bonds, mutual funds, and ETFs
- Real estate (other than your principal residence)
- Business assets and goodwill
- Shares of private corporations
- Cryptocurrency (treated as capital property or business income depending on circumstances)
- Collectibles, art, and other personal-use property above $1,000
Capital Gains Inclusion Rate in 2026
Canada does not tax the full amount of a capital gain — only a portion (the "inclusion rate") is included in your taxable income. For 2026, the inclusion rates are:
| Taxpayer | Capital Gains Up To $250,000 | Capital Gains Above $250,000 |
|---|---|---|
| Individuals | 50% (one-half) | 66.67% (two-thirds) |
| Corporations | 66.67% (two-thirds) | 66.67% (two-thirds) |
| Most trusts | 66.67% (two-thirds) | 66.67% (two-thirds) |
The two-thirds inclusion rate for capital gains above $250,000 for individuals was introduced in the 2024 federal budget and applies to dispositions on or after June 25, 2024. This change significantly increased the tax cost of large capital gains for high-income Canadians and business owners.
For example, if you realize a $500,000 capital gain as an individual in 2026:
- The first $250,000 is included at 50% = $125,000 taxable
- The remaining $250,000 is included at 66.67% = $166,675 taxable
- Total taxable capital gain = $291,675
The Principal Residence Exemption
The Principal Residence Exemption (PRE) is one of the most valuable tax benefits in the Canadian tax system. It allows you to shelter the capital gain on the sale of your home from tax, provided the property qualifies as your principal residence for each year you owned it.
To qualify as a principal residence, the property must:
- Be a housing unit (house, condo, cottage, mobile home, etc.)
- Be owned by you (or your spouse, common-law partner, or child)
- Be ordinarily inhabited by you or a family member in the year
- Be designated as your principal residence for the year
You can only designate one property as your principal residence per year. If you own multiple properties (such as a home and a cottage), you must choose which one to designate for each year. Strategic designation can minimize your overall capital gains tax.
Since 2016, you must report the sale of your principal residence on your tax return (Schedule 3 and Form T2091), even if the full gain is exempt. Failure to report can result in penalties.
Lifetime Capital Gains Exemption (LCGE)
The Lifetime Capital Gains Exemption (LCGE) is an exceptionally valuable tax benefit for Canadian small business owners, farmers, and fishers. For 2026, the LCGE limit is $1,250,000 per individual for:
- Qualified Small Business Corporation (QSBC) shares
- Qualified farm property
- Qualified fishing property
This means that if you sell shares of a qualifying small business corporation, you can shelter up to $1,250,000 of capital gains from federal income tax. For a couple, this doubles to $2,500,000. The LCGE is one of the primary reasons why incorporating a business and structuring it correctly can result in enormous tax savings upon sale.
To qualify for the LCGE on QSBC shares, the corporation must meet several tests, including the basic asset test (90% of assets used in an active business), the holding period test (shares owned for 24 months), and the asset test (50% of assets used in an active business throughout the 24-month holding period). Our corporate tax specialists at BOMCAS Canada can help you structure your corporation to qualify for the LCGE well in advance of a sale.
Using Capital Losses to Offset Gains
A capital loss occurs when you sell a capital property for less than its ACB. Capital losses can be used to offset capital gains, reducing your overall tax liability. The rules are:
- Current year: Capital losses can offset capital gains realized in the same year
- Carryback: Net capital losses can be carried back up to three years to offset capital gains in those years
- Carryforward: Net capital losses can be carried forward indefinitely to offset future capital gains
One important restriction is the superficial loss rule: if you sell a security at a loss and repurchase the same or an identical security within 30 days before or after the sale, the loss is denied. This prevents taxpayers from artificially triggering losses while maintaining their investment position.
Tax Planning Strategies for Capital Gains
At BOMCAS Canada, our tax planning specialists use a range of strategies to minimize capital gains tax for our clients:
- Timing of dispositions: Spreading large gains over multiple tax years to stay below the $250,000 threshold and benefit from the lower 50% inclusion rate
- Donating securities to charity: Donating publicly traded securities directly to a registered charity eliminates the capital gains tax on the donated shares entirely
- TFSA investing: Holding growth investments inside a TFSA means capital gains are completely tax-free
- Estate freeze: A corporate reorganization technique that freezes the current value of a business owner's shares, allowing future growth to accrue to the next generation and potentially multiply the LCGE benefit
- Prescribed rate loans: Splitting income with a lower-income spouse or family member to reduce the overall tax rate on capital gains
- Crystallizing the LCGE: Triggering a capital gain on QSBC shares to use the LCGE before the corporation no longer qualifies
How to Report Capital Gains
Capital gains are reported on Schedule 3 of your T1 personal income tax return. You must report each disposition separately, including the date of acquisition, proceeds of disposition, ACB, and any outlays and expenses. The net capital gain is then transferred to Line 12700 of your T1 return.
For the sale of your principal residence, you must also complete Form T2091 (Designation of a Property as a Principal Residence by an Individual). Even if the full gain is exempt, this form must be filed.
Corporations report capital gains on their T2 corporate income tax return using Schedule 6 (Summary of Dispositions of Capital Property).
Frequently Asked Questions
What is the capital gains inclusion rate in Canada for 2026?
For individuals, the inclusion rate is 50% on the first $250,000 of capital gains and 66.67% on gains above $250,000. For corporations and most trusts, the inclusion rate is 66.67% on all capital gains.
Do I have to pay capital gains tax when I sell my home in Canada?
Generally no, if the property was your principal residence for every year you owned it. The Principal Residence Exemption shelters the full gain from tax. However, you must still report the sale on your tax return.
What is the Lifetime Capital Gains Exemption (LCGE) in Canada?
The LCGE allows eligible individuals to shelter up to $1,250,000 (2026) in capital gains from the sale of qualified small business corporation shares or qualified farm and fishing properties from federal tax.
How can I reduce capital gains tax in Canada?
Strategies include using capital losses to offset gains, donating securities to charity, using the principal residence exemption, claiming the LCGE, spreading gains over multiple years, holding investments in a TFSA, and using an estate freeze for business owners.
Get Expert Capital Gains Tax Advice from BOMCAS Canada
Capital gains tax planning requires expertise and forward thinking. Whether you are selling investments, real estate, or a business, the strategies you implement before the sale can make a significant difference in your after-tax proceeds. At BOMCAS Canada, our Tax Planning specialists and Personal Tax Accountants work with clients across Edmonton and all of Canada to develop comprehensive capital gains tax strategies.
Book a free consultation today or call 780-667-5250.
Capital Gains in Trusts and Estates
Capital gains realized inside a trust or estate are subject to special rules. When a trust or estate disposes of capital property, the resulting capital gain is generally taxable in the trust or estate at the highest marginal rate unless it is allocated to a beneficiary. When a capital gain is allocated and paid to a beneficiary, it retains its character as a capital gain in the beneficiary's hands, allowing them to benefit from the 50% inclusion rate and the lifetime capital gains exemption if applicable.
Upon death, a taxpayer is deemed to have disposed of all capital property at fair market value immediately before death. This deemed disposition can trigger significant capital gains, particularly for individuals holding appreciated real estate, investments, or shares of a private corporation. Proper estate planning — including the use of spousal rollovers, testamentary trusts, and charitable bequests — can minimize the capital gains tax triggered at death. BOMCAS Canada's estate tax planning team can help you develop a comprehensive plan to protect your estate from unnecessary tax.
Capital Gains Tax Planning Strategies
There are several legitimate strategies Canadian taxpayers can use to reduce their capital gains tax liability. Capital loss harvesting involves selling investments with accrued losses before year-end to offset capital gains realized during the year. Installment sales allow you to spread the proceeds of a sale over multiple years, potentially keeping you in a lower tax bracket each year. Charitable donations of appreciated securities allow you to eliminate the capital gain entirely while receiving a charitable donation tax credit for the full fair market value of the donated securities. Rollovers to a spouse or common-law partner allow you to defer capital gains by transferring property at cost rather than fair market value. BOMCAS Canada's tax planning specialists can help you identify the strategies best suited to your situation.
