How Capital Gains Are Taxed in Canada
A capital gain arises when you sell a capital property for more than its adjusted cost base (ACB). The taxable capital gain is your gain multiplied by the inclusion rate:
- Individuals: 50% inclusion on the first $250,000 of gains per year; 66.67% above $250,000
- Corporations and trusts: 66.67% on all capital gains (no $250,000 threshold)
Example: You sell a commercial property for a $400,000 gain. As an individual, $125,000 is taxable at your marginal rate on the first half, and $100,000 on the upper portion at 66.67% — the blended impact is significant.
The Lifetime Capital Gains Exemption (LCGE)
The LCGE is one of the most powerful tax shelters available to Canadian small business owners. In 2026, the exemption limit for Qualified Small Business Corporation Shares (QSBCS) is approximately $1,250,000.
To claim the LCGE, your corporation must be a Canadian-Controlled Private Corporation (CCPC) and must meet three tests:
- Active business test: At least 90% of fair market value of assets used in active business at sale
- 24-month holding test: Shares owned for at least 24 months before the sale
- 50% test: More than 50% of assets used in active business throughout the 24 months
Planning tip: If your corporation holds investment assets (GICs, rental properties), these may disqualify shares. Work with your accountant to purify the corporation before a sale.
Capital Gains on the Sale of Business Assets
When a corporation sells assets (equipment, goodwill, client lists) rather than shares, the proceeds are taxed differently:
- Depreciable property triggers recaptured CCA (fully taxable as income) plus capital gains on any amount above original cost
- Eligible Capital Property (goodwill) is included in Class 14.1 — half the amount is a capital gain, the other half recapture
- Land generates capital gains taxed at the new 66.67% inclusion rate
An asset deal typically results in higher taxes for the seller than a share deal. If a buyer insists on an asset purchase, negotiate a higher price to compensate.
Tax-Loss Harvesting to Offset Capital Gains
Capital losses can only offset capital gains — not other income. However, you can:
- Carry losses back 3 years or forward indefinitely
- Sell losing investments before year-end to offset gains realized during the year
- Trigger losses inside a corporation to reduce corporate-level capital gains
Watch for the superficial loss rule: if you or an affiliated person buys back the same or identical property within 30 days before or after the sale, the loss is denied.
Frequently Asked Questions
Per calendar year. Each year, the first $250,000 of capital gains for individuals is included at 50%. Gains above $250,000 in the same year are included at 66.67%. Corporations have no threshold — all gains are included at 66.67%.
Only to Qualified Farm or Fishing Property and Qualified Small Business Corporation Shares — not to rental or commercial real estate. The Principal Residence Exemption is a separate shelter for personal homes.
At death, CRA deems a disposition of all capital property at fair market value. This can create a large taxable capital gain in the final return. Life insurance, spousal rollovers, and testamentary trusts are common planning tools.
Yes — an installment sale (vendor take-back mortgage or earn-out) can spread proceeds over multiple years, keeping annual gains below the $250,000 threshold. This must be structured carefully to qualify under the Income Tax Act.