In Canada, a capital gain is taxed by including 50% of the gain in your income and taxing that half at your marginal tax rate — the other half is tax-free. As of the 2026 tax year the inclusion rate is 50% for everyone: the proposed increase to a two-thirds inclusion rate announced in the 2024 federal budget was deferred in early 2025 and then cancelled, so no higher rate applies. Sellers of qualifying small-business shares may also shelter gains using the Lifetime Capital Gains Exemption (LCGE), which is $1,275,000 for 2026 dispositions after indexation resumed in 2026.
This guide explains how the 50% rule works, how to calculate the tax, the principal-residence exemption, the LCGE and QSBC rules, and how capital gains differ for corporations.
The 50% inclusion rate, and the increase that was cancelled
A capital gain arises when you sell (or are deemed to sell) a capital asset — shares, a rental property, a business, mutual funds — for more than its adjusted cost base (ACB). Canada does not tax the whole gain. Under the inclusion rate, only a portion is added to taxable income.
The 2024 federal budget proposed raising the inclusion rate from one-half to two-thirds on gains above $250,000 per year for individuals, and on all gains for corporations and most trusts, effective June 25, 2024. That change was first deferred to January 1, 2026, and then, in March 2025, cancelled entirely. The 2025 federal budget (tabled November 4, 2025) confirmed the cancellation. The result for the 2026 tax year: the inclusion rate is 50% across the board, the rate that has applied for decades.
How to calculate capital gains tax
The calculation has three steps.
- Capital gain = Proceeds of disposition − Adjusted cost base − Outlays and expenses of selling.
- Taxable capital gain = Capital gain × 50% inclusion rate.
- Tax = Taxable capital gain × your marginal tax rate.
| Item | Example |
|---|---|
| Proceeds of disposition | $400,000 |
| Adjusted cost base (ACB) | $290,000 |
| Selling costs (e.g., commission, legal) | $10,000 |
| Capital gain | $100,000 |
| Inclusion rate (2026) | 50% |
| Taxable capital gain | $50,000 |
| Marginal rate (illustrative) | 40% |
| Tax payable | $20,000 |
The marginal rate depends on your province and total income. In Alberta the 2026 combined federal-provincial top marginal rate on a capital gain is roughly half of the top ordinary rate, because only half the gain is taxed. To run your own numbers, use our capital gains tax calculator.
A capital loss works in reverse: 50% of the loss is an allowable capital loss that can only be applied against taxable capital gains (not ordinary income), carried back three years or forward indefinitely.
The principal residence exemption
The principal residence exemption (PRE) can eliminate the capital gain on your home for the years it qualified as your principal residence. A family unit can designate one property per year. Even when the gain is fully exempt, you must report the sale and designate the property on your return (Schedule 3 and Form T2091 where required). Since 2016 the CRA enforces this reporting; missing it can mean penalties and denial of the exemption.
The Lifetime Capital Gains Exemption (LCGE)
The LCGE is one of the most valuable planning tools for Canadian business owners. It lets an individual shelter capital gains realized on the sale of:
- Qualified small business corporation (QSBC) shares, and
- Qualified farm or fishing property.
The lifetime limit was increased to $1.25 million for dispositions on or after June 25, 2024, and indexation to inflation resumed in 2026, bringing it to $1,275,000 for 2026 dispositions. It is a cumulative lifetime pool, not an annual amount — once used, it is gone, though it can be claimed in pieces across multiple qualifying sales.
Because only 50% of a gain is taxable, the $1,275,000 exemption shelters up to roughly $637,500 of taxable capital gain from tax. For a couple who each own shares, the exemption can potentially be multiplied — a core reason owner-managers structure share ownership early.
QSBC shares: the qualification tests
To use the LCGE on a share sale, the shares must be QSBC shares. Three tests matter:
- Small business corporation test (at the time of sale): the company must be a Canadian-controlled private corporation (CCPC) with all or substantially all (generally 90%+) of its assets used in an active business carried on primarily in Canada.
- Holding-period test: you (or a related person) must have owned the shares for at least 24 months before the sale.
- Asset-use test (throughout the 24 months): more than 50% of the company's assets were used in active business during that period.
These tests are technical, and a company can be "purified" before a sale (removing excess passive assets such as surplus cash or investments) to qualify. Because purification and timing must be planned well ahead of a transaction, eligibility should be confirmed long before you have a buyer.
How corporations are taxed on capital gains
The 50% inclusion rate is identical for corporations. What differs is the treatment of the two halves:
- The non-taxable half is added to the company's capital dividend account (CDA) and can be distributed to shareholders as a tax-free capital dividend.
- The taxable half is subject to corporate tax. For a CCPC earning investment income, part of that tax is refundable (through the RDTOH mechanism) when taxable dividends are paid, preserving integration so that earning a gain inside a corporation versus personally produces a broadly similar overall tax result.
This integration — and the CDA in particular — is why the salary-versus-dividend and corporate-investment decisions are intertwined with capital-gains planning. See our pillar on salary vs dividends in Canada for how owner-manager compensation interacts with corporate-level tax.
How RN Canada helps
RN Canada advises Alberta and BC business owners on capital-gains planning around the events that matter most: selling a business, transferring shares to family, restructuring, or selling a rental or investment property. We assess LCGE and QSBC eligibility, model the after-tax outcome of asset sales versus share sales, plan corporate purification ahead of a transaction, and coordinate the capital dividend account so the tax-free portion reaches shareholders correctly. Our bookkeeping and tax filing and corporate finance and capital restructuring services cover both the compliance and the structuring. For quick answers, see our corporate tax FAQ.
Frequently asked questions
The inclusion rate is 50% for the 2026 tax year. That means one-half of a capital gain is added to your taxable income and taxed at your marginal rate; the other half is tax-free. The proposed increase to a two-thirds inclusion rate, announced in the 2024 federal budget, was deferred and then cancelled in 2025, so the long-standing 50% rate continues to apply to everyone.
Take your proceeds of disposition, subtract the adjusted cost base (what you paid plus eligible costs) and any selling expenses to get the capital gain. Multiply by the 50% inclusion rate to get the taxable capital gain, then apply your marginal tax rate. On a $100,000 gain, $50,000 is taxable; at a 40% marginal rate that is roughly $20,000 of tax.
The LCGE lets an individual shelter capital gains on the sale of qualified small business corporation (QSBC) shares and qualified farm or fishing property from tax, up to a lifetime limit. The limit was raised to $1.25 million for dispositions on or after June 25, 2024, and with indexation resuming in 2026 it is $1,275,000 for 2026 dispositions. It is a once-in-a-lifetime cumulative pool, not an annual allowance.
To be QSBC shares, the company must be a small business corporation (a Canadian-controlled private corporation using substantially all of its assets in an active business in Canada) at the time of sale, you generally must have held the shares for at least 24 months, and during that period the company must have met an asset-use test. The rules are technical, so confirm eligibility before a sale.
Generally no. The principal residence exemption can eliminate the capital gain on the sale of your home for the years it qualified as your principal residence. You must still report the sale on your tax return and designate the property, even when the full gain is exempt. Failing to report can result in penalties and loss of the exemption.
The 50% inclusion rate is the same for corporations. But the non-taxable half of a corporation's capital gain flows to its capital dividend account (CDA), which can be paid out to shareholders tax-free. The taxable half is subject to corporate tax (with a refundable portion for investment income in a CCPC). This integration is a key reason to plan share sales and asset sales carefully.