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Income Tax Act s. 3(b), 38(a), 39, 248(1)
What Is a Capital Gain or Loss?
Personal-Use Property and Listed Personal Property
Transfers of Income-Producing Property to a Spouse
Definitions
Inclusion Rate (IR) forCapital Gains and Losses
Taxable Capital Gain
Allowable Capital Loss
Capital Losses /Inclusion Rate on the Notice of Assessment
Net CapitalLosses in the Detailed Tax Calculators
Deduction of Capital Losses
Capital Losses and Death of a Taxpayer
Pre-1986 Capital Losses
Business Investment Loss
Superficial Losses and Non-Deductible Losses
Capital Gains and Losses on the Tax Return
Capital Losses Carried Forward Complications
Joint Owners of Capital Property
CCPC and Capital Dividend
Reduction or Deferral of Capital Gains
1994 Capital Gains Election
TaxTips.ca Resources
Canada Revenue Agency (CRA) Resources
What Is a Capital Gain or Loss?
A capital gain or loss is the gain or loss resulting from the sale of property, such as stocks, bonds, art, stamp collections, real estate, and promissory notes. These sales, including deemed dispositions, must be reported on the tax return, even if the property is located in another country. Gains or losses from bad debts, foreign exchange and call and put options are also normally considered capital gains or losses.
Personal-Use Property and Listed Personal Property
Some assets are considered personal-use property, such as cottages, cars, boats, and furniture (unless these are business assets). Some personal-use property is considered listed personal property (LPP), such as works of art, and stamp collections.
The gains and losses for personal-use property and LPP are calculated separately from gains and losses on other capital assets. See our articles on Listed Personal Property and Personal-use Property for more information.
Transfers of Income-Producing Property to a Spouse
If income-producing property, or money which is used to purchase income-producing property, is transferred or loaned to a spouse, the income and capital gains from the property will normally be attributed back to the person giving the gift or loan. The treatment is slightly different for transfers to arelated minor. See our article on Attribution Rules re Gifts, Transfers, or Loans to a Spouse or a Related Minor Child.
Definitions
When the inclusion rate is 50%:
 | Taxable capital gains = 50% x capital gains. |
| Allowable capital losses = 50% x capital losses. |
When the inclusion rate is 2/3rds:
| Taxable capital gains = 2/3 x capital gains |
| Allowable capital losses = 2/3 x capital losses |
Net capital losses = the excess of allowable capital losses over taxablecapital gains. An allowable capital loss is thecapital loss times the inclusion rate for the year in which the lossoccurred. The inclusion rates forcapital gains and losses have changed over the years. When an inclusionrate change is announced by the federal government, the new rate would usuallybe effective on or after the day after the announcement. The following table shows the inclusion rates for eachperiod, starting in 1972 when capital gains first became taxable in Canada:Inclusion Rate(IR) forCapital Gains and Losses
Income Tax Act s. 38(a)
| Year | Inclusion Rate (IR) |
| June 25, 2024 and later (1) | 1/2 | 2/3 |
| 2001 to June 24, 2024 | 1/2 |
| Oct 17 to Dec 31, 2000 | 1/2 |
| Feb 28 to Oct 16, 2000 | 2/3 |
| Jan 1 to Feb 27, 2000 | 3/4 |
| 1990 to 1999 | 3/4 |
| 1988 and 1989 | 2/3 |
| 1972 to 1988 | 1/2 |
| Before 1972 | nil |
(1) The 2024 Federal Budget proposes (no legislation has yet been tabled):
| 2/3 inclusion rate for corporations and trusts, and |
| 2/3inclusion rate for individuals for capital gains in excess of $250,000 in the year, net of anycurrent-year capital losses, capital losses of other years applied to reducecurrent-year capital gains, and capital gains for which the Lifetime CapitalGains Exemption, the proposed Employee Ownership Trust Exemption, or theproposed Canadian Entrepreneurs' Incentive is claimed. |
In order to sell an investment before the inclusion rate increase (thefederal government is counting on this, to lower their 2024 deficit), thesettlement date of the sale would have to be June 24, 2024 or earlier. Forinvestments traded on a stock exchange, the last sale date to ensure this wouldbe Friday, June 21, 2024, as the T+1settlement date (1 day after trade date) went into effect May 27, 2024. For discussion on the capital gains inclusion rate increase by Jamie Golombek,Managing Director, tax and Estate Planning, CIBC Private Wealth, see 2024Federal Budget: Selected Measures. TechnicalInterpretation TI 2024-1016011E5 - General Anti-Avoidance Rule (GAAR), datedApril 29, 2024 discussed whether the crystallization of an accruedgain prior to the increase in the capital gains inclusion rate is subject toGAAR. The position of CRA is that the crystallization, "solely as a meansof ensuring access to the current inclusion rate, would not, in itself, besubject to GAAR". However, the TI also stated: "It is important to note, however, that the crystallization of an accrued capital gain as part of a series of transactions, one of the main purposes of which is to obtain a tax benefit (other than, or in addition to, the taxation of an accrued gain at the current inclusion rate) would not be immune from scrutiny under theGAAR.In particular, we would refer you to our letter dated February 29, 2024 (CRA document2023-0987941I7), in which we stated that the Income Tax Rulings Directorate would not provide rulings in respect of a series of transactions in which an individual shareholder proposes to engage in non-arm’s length transactions, one of the main purposes of which was to facilitate the extraction of corporate retained earnings other than in the form of adividend." A taxable capital gain is the amount of a capital gain multiplied bythe inclusion rate (see above). The capital gain or loss is calculated by deducting the adjustedcost base of the asset plus any outlays and expenses incurred to sell theproperty from the proceeds received on the sale of the asset. Taxable capital gains less allowable capital losses for the current year areincluded in taxable income for the year. However, if allowable capitallosses exceed taxable capital gains, there is no deduction in the current yearexcept in . There will be a net capital loss tobe carried back to previous years or forward to future years. When carriedback or forward, they are deducted after the calculation of Line23600 Net Income for Tax Purposes, which is used to calculate clawbacks, sometax credits, and many income-tested benefits. Because not 100% of the gain is taxable, less tax is paid on capital gains than on income such as interest. If the property is located in another country, the original cost must be converted to Canadian $ using theexchange rate at the time of the purchase, or at the time of becoming a Canadianresident. The proceeds must be converted to Canadian $ at the time of thedisposition. There may be a foreign tax credit for taxes paid on the gain in the other country, depending on the tax treaty (if any) between Canada and the other country. Note that a cottage (i.e., 2nd home) may be able to qualify for the principal residence exemption, even if located in another country. An allowable capital loss is a capital loss multiplied by the inclusion rate (see above). It can only be used to reduce or eliminate taxable capital gains, except in the year of a taxpayer's death or the immediately preceding year, when it can be used to reduce other income. When allowable capital losses exceed taxable capital gains in a year, the difference is the net capital loss for the year. See our article on Capital Losses for more information about carrying these losses back or forward, and for the treatment of capital losses on the death of a taxpayer. If you have unused netcapital losses from previous years, the amount will be shownon your latest assessment notice from CRA. The amountshown on the assessment notice is the netcapital loss. In order to use some or allof these losses on the current year tax return, you wouldclaim the amount of the net capital loss on line 25300 of yourtax return. This amount claimed cannot exceed theamount of taxable capital gains that you are showing on line12700 of your return. Your assessment notice should indicate if your inclusionrate differs from the current inclusion rate.For 2000, where there were 3 different rates, yourassessment notice should show a combined inclusion rate forall net capital losses of that year. If the inclusion rate fromyour net capital losses from previous years is differentfrom the current year inclusion rate, you will have toadjust the amounts to the current year inclusion rate in order to input the netcapital loss amount into the . The formula for converting prior net capitallosses is Prior net capital loss ÷ Prior IR xCurrent IR For instance, if your netcapital loss with a 50% inclusion rate was $3,000, and youare using this to offset taxable capital gains with aninclusion rate of 2/3rds, the adjusted net capital loss to usewould be $3,000 ÷ 0.5 x 2/3 = $6,000 x 2/3 = $4,000. The $4,000 would be enteredon line 25300 of your tax return, as long as your taxablecapital gains on line 12700 are at least $4,000.Taxable Capital Gain
Allowable Capital Loss
Capital Losses /Inclusion Rate on the Notice of Assessment
Net CapitalLosses in the Detailed Tax Calculators
If you have net capitallosses carried forward from 1985 and earlier years, specialrules apply. The CRA guide T4037 Capital Gains has asection regarding howto apply your net capital losses of other years to thecurrent tax year, which includes information on pre-1986losses.
Deduction of Capital Losses
Capital losses can normally only be used to reduce or eliminate capital gains. They cannot be used to reduce other income, except in the year of death or the immediately preceding year (see below).
If you have capital losses that exceed capital gains in the current year, you have a net capital loss. You can (but don't have to) carry back the net capital loss to any of the 3 preceding taxation years to be deducted against taxable capital gains in those years. Net capital losses can also be carried forward indefinitely. They can be used to offset taxable capital gains (in part or in full) in future years, but there is no requirement to use them when capital gains arise.
Capital Losses and Death of a Taxpayer
Capital losses can be used to reduce other income (instead of just reducing capital gains) in the year of a taxpayer's death, or the immediately preceding year. At this time, the net capital loss (50% of the capital loss, when the inclusion rate is 50%) would be used to reduce other income. This is done by entering a negative amount on line 12700 of the tax return, which will be done automatically by tax software (from Schedule 3) if you indicate that the return is a return for the year of death.
The net capital loss used to reduce other income must be ignored when calculating certain tax credits and clawbacks that use net income before taxes from line 23400. Again, tax return software will do this automatically.
See also Death of a Taxpayer / Loss on Residence Sold by Estate.
For more on this topic,see the Canada Revenue Agency (CRA) interpretation bulletin IT232R3- Losses - Their Deductibility in the Loss Year or OtherYears (Archived) paragraph 30, and T4011 Preparing Returns for Deceased Persons Chapter 5 - Net Capital Losses.
Pre-1986 Capital Losses
Income Tax Act s. 111(1.1)
If a taxpayer has pre-1986 net capital losses, up to $2,000 of those losses can be used each tax year to reduce other income. For more information on this, see Chart 5 - Applying net capital losses of other years to 2021 (for taxpayers with a pre-1986 capital loss balance) on the CRA website.
Business Investment Loss
A loss on shares or debt may be considered a business investment loss instead of a capital loss, in certain circ*mstances. See our article Business Investment Loss and allowable business investment loss (ABIL).
Superficial Losses and Non-Deductible Losses
If you plan to sell shares at a loss and buy them back either before or after selling them, see our article on Superficial Losses to ensure that your loss isn't disallowed.
Losses on transfers of shares to an RRSP, TFSA, DPSP or RDSP are not deductible.
Capital Gains and Losses on the Tax Return
Your capital gains and losses must be recorded on the tax return for the year in which the lossesoccurred. This applies even when the losses exceed the gains, and cannot beused in the current year. These losses will then be available to use in afuture tax year, or can be carried back.
Current year capital gains and losses are recorded on Schedule 3 of the personal income tax return, by reporting the proceeds of disposition less the adjusted cost base. When allowable capital losses exceed taxable capital gains in a year, the difference is the net capital loss for the year.
To carry back your current year netcapital losses to prior years, you would file form T1A- Request for loss carryback with your tax return. This can usually bedone within income tax software.
If you want to revise a previousyear's return in which you should have reported capital losses, you would file formT1Adj. See our article on changingyour tax return.
Capital Losses Carried Forward Complications
Be aware that when net capital losses carried forward are used to reduce taxable capital gains in a subsequent year, they are deducted on line 25300 of the tax return, which is after the calculation of line 23600, net income for tax purposes. Capital gains in the year may still cause an increase in tax. This is because there are tax credits, such as the medical expense tax credit and age amount tax credit, as well as clawbacks of Old Age Security benefits and employment insurance benefits, that are based on:
| your net income before adjustments (line 23400) or |
| your net income for tax purposes (line 23600). |
Some income-tested benefits, such as the GST/HST tax credit, and the Child Tax Benefit, are also calculated based on line 23600. See our article on how to calculate Total Income For Tax Purposes, Net Income For Tax Purposes, and Taxable Income. If possible, it may be best to dispose of some investments with capital gains to offset those capital losses so they don't have to be carried forward. See CapitalGains Can Increase Your OAS Clawback - even if you have net capital lossescarried forward that will completely eliminate the taxable capital gains. Tax Tip: It may be better for tax purposesto offset your capital losses with capital gains instead of carrying themforward, if possible! That is, if you have investments with unrealizedgains, sell some to offsetthe losses. When a capital property is owned by more than 1 person, such as a taxpayer and spouse, the proceeds of sale would normally be allocated to each owner based on their percentage ownership. However, there can be potential problems with joint ownership. See Joint Ownership of Assets and in the same article, Beneficial Ownership vs Legal Ownership. When a Canadian controlled private corporation (CCPC) has a capital gain, the non-taxable portion of the capital gain can be paid out to shareholders as a capital dividend on a tax-free basis. Capital gains can be reduced, deferred, or eliminated by: Principal residence exemption, which can also be used for a vacation home or cottage Transfer of capital property to a spouse or spousal trust on death Donating capital property instead of cash can eliminate capital gains or increase your donations limit Capital gain reserve - you may be able to spread your capital gain over a number of years Election to designate the amount of proceeds on donated capital property Prior to 1994 there was a $100,000 capital gains exemption which could beused for all capital gains. On February 22, 1994, the federal governmentannounced that the exemption would no longer be available for capital propertyor eligible capital property sold after February 22, 1994. A one-time election was made available to allow those who owned capital oreligible capital property at February 22, 1994, to report a capital gain ontheir 1994 tax return in order to take advantage of the unused portion of their$100,000 capital gains exemption. The election was made on form T664, andyou may have had to also complete forms T657, Calculation of Capital GainsDeduction on All Capital Property, and Form T936, Calculation ofCumulative Net Investment Loss (CNIL) to December 31, 1994. It waspossible that not all of the declared capital gain would be exempt, depending onthe CNIL balance. Once form T664 was completed for a real estate property, the new adjustedcost base was entered on the Capital Gains Election Supplementary page, in ChartB - Other Capital Properties. When spouses completed this election for aproperty of which they each owned 50%, such as a vacationhome or cottage, they would each have declared 50% of the capital gain,so the Chart B new adjusted cost base would be 50% of the new adjusted cost basefor the property. More information on the 1994 election is available in the 1994 Capital GainsElection Package (pdf). Lifetime Capital Gains Exemption (LCGE) Real Estate Sales - Are They Taxable? What About My Principal Residence? Death of a Taxpayer / Loss on Residence Sold by Estate Tax treatment of income from investments in call and put options Try to earn your investment income (outside of RRSPs) at the lowest tax rate possible Attribution Rules re Gifts, Transfers, or Loans to a Spouse or a Related Minor Child Deemed Disposition of Property Non-Capital Losses SuperficialLosses and Other Disallowed Losses TransferCapital Losses to a Spouse Transfer shares to an RRSP or TFSA, but not at a loss! Business investment loss and allowable business investment loss (ABIL) Tax treatment of income from different investments Superficial losses Worthless shares or debt Tax Tip: Only 50% (2/3rds for gains over $250,000 after June 24, 2024, for an individual) of a capital gain is taxed, and the gain is not included in income until the item is sold, allowing you to compound your returns tax-free until you sell. Revised: May 28, 2024Joint Owners of Capital Property
CCPC and Capital Dividend
Reduction or Deferral of Capital Gains
1994 Capital Gains Election
TaxTips.ca Resources
Canada Revenue Agency (CRA) Resources
