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Capital Gains and Losses

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) for Capital Gains and Losses

    How Does The Uncertainty Affect Tax Software, Tax Calculators and Taxpayers?

    CRA Proceeding With Implementation of Inclusion Rate Increase / Interest Relief

    Capital Gains Inclusion Rate Timing

Taxable Capital Gain

Allowable Capital Loss

Capital Losses / Inclusion Rate on the Notice of Assessment

Capital Gains & Capital Losses in the TaxTips.ca Detailed Tax Calculator

Inclusion Rate for Net Capital Losses Carried Forward

2024 Inclusion Rate for Net Capital Losses Carried Forward

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

Claiming Capital Losses Not Previously Reported 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 a related 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 2/3^rds:

Net capital losses = the excess of allowable capital losses over taxable capital gains.

Inclusion Rate (IR) for Capital Gains and Losses

Income Tax Act s. 38(a)

An allowable capital loss is the capital loss times the inclusion rate for the year in which the loss occurred.  The inclusion rates for capital gains and losses have changed over the years.  When an inclusion rate change is announced by the federal government, the new rate would usually be effective on or after the day after the announcement.  The following table shows the inclusion rates for each period, starting in 1972 when capital gains first became taxable in Canada:

(1) The 2024 Federal Budget proposes (only Draft Legislation is available as of September 23, 2024):

Quebec has announced that it will also increase the capital gains inclusion rate in the same manner as the federal change.

How Does The Uncertainty Affect Tax Software, Tax Calculators and Taxpayers?

Canada Revenue Agency (CRA) does not normally consider proposed tax changes to be in effect until legislation for those changes has been tabled and passed. Very often, legislation for tax changes indicates that it does not take effect until the date of Royal Assent.

As of October 21, 2024, the Notice of Ways and Means Motion for the capital gains inclusion rate increase has been on the Agenda of the House of Commons for some time, but has not yet reached the stage of a Bill.

CRA Proceeding With Implementation of Inclusion Rate Increase Despite No Legislation Passed / Interest Relief

According to Kim G C Moody in a Financial Post article and Erica Alina in a Globe and Mail article, "If Parliament is dissolved for an election before the higher inclusion rate has become law, the CRA will continue to administer the proposed legislation. The exception would be if the government dissolved as a result of a vote on a motion of non-confidence directly related to the proposed measure. In such a case, the CRA would cease to administer the proposed measure. Once Parliament resumes, if no bill is passed in the House of Commons, and if the government signals its intent not to proceed with the measure, the CRA would stop administering it."

In mid-November 2024, CRA added information to its website regarding the fact that the changes to the capital gains inclusion rate effective June 25, 2024, are being administered based on the proposals included in the Notice of Ways and Means Motion (NWMM) that was tabled in Parliament on September 23, 2024. This NWMM has not yet reached the stage of a bill. From their announcement:

For all taxpayers, the new inclusion rate will apply to capital gains realized on or after June 25, 2024. Impacted forms for individuals, trusts and corporations are expected to be on Canada.ca as of January 31, 2025. Arrears interest and penalty relief, if applicable, will be provided for those corporations and trusts impacted by these changes that have a filing due date on or before March 3, 2025. The interest relief will expire on March 3rd. More information will be forthcoming in the coming weeks.

On October 21, 2024, Ryan Minor, CPA, Director of Tax, CPA Canada, posted on LinkedIn: Filing Uncertainty: Capital Gains Realized After June 24, 2024, indicating that CRA is proceeding with the implementation of the capital gain inclusion rate change. He provides a portion of the letter received from CRA re the reporting of capital gains realized on or after June 25, 2024, for corporations (T2), individuals (T1) and trusts (T3).

Tax software providers also do not normally revise their products until legislation has been passed. The TaxTips.ca Calculators are also not usually revised until legislation has at least been tabled in Parliament. Until legislation has been tabled and received Royal Assent, we cannot be certain that these changes will actually happen! Taxpayers are facing uncertainty, and cannot do appropriate tax planning. Executors of estates of those who passed away after June 24, 2024 cannot determine tax liability for a deceased who passed away with capital gains in excess of $250,000.

Jay Goodis, CPA, CEO of Tax Templates Inc. stated in a LinkedIn post (you don't need to be a LinkedIn user to view this) "When proposed changes are not finalized, Canadians and their advisors are left in a state of uncertainty, unable to make informed decisions about their financial and tax planning." He talks about how this affects tax professionals, taxpayers, executors, financial planners, interest and penalties on unpaid taxes, and of course CRA.  He closes by saying "Canadians deserve certainty when planning their financial affairs, and professionals need a stable framework to support their clients effectively. At a minimum, the government needs to recognize the impact of prolonged uncertainty and move to pass or clarify the proposed changes swiftly."

Capital Gains Inclusion Rate Timing

In order to sell an investment before the inclusion rate increase (the federal government was counting on this, to lower their 2024 deficit), the settlement date of the sale would have to have been June 24, 2024 or earlier. For investments traded on a stock exchange, the last sale date to ensure this would have been Friday, June 21, 2024, as the T+1 settlement 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 2024 Federal Budget: Selected Measures.

Five major issues to consider for the upcoming capital gains tax change by David-Alexandre Brassard, Chief Economist at Chartered Professional Accountants of Canada.

Technical Interpretation TI 2024-1016011E5 - General Anti-Avoidance Rule (GAAR), dated April 29, 2024 discussed whether the crystallization of an accrued gain prior to the increase in the capital gains inclusion rate is subject to GAAR. The position of CRA is that the crystallization, "solely as a means of ensuring access to the current inclusion rate, would not, in itself, be subject 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 the GAAR. In particular, we would refer you to our letter dated February 29, 2024 (CRA document 2023-0987941I7), 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 a dividend."

Taxable Capital Gain

A taxable capital gain is the amount of a capital gain multiplied by the inclusion rate (see above).  The capital gain or loss is calculated by deducting the adjusted cost base of the asset plus any outlays and expenses incurred to sell the property from the proceeds received on the sale of the asset.

Taxable capital gains less allowable capital losses for the current year are included in taxable income for the year.  However, if allowable capital losses exceed taxable capital gains, there is no deduction in the current year except in .  There will be a net capital loss to be carried back to previous years or forward to future years.  When carried back or forward, they are deducted after the calculation of Line 23600 Net Income for Tax Purposes, which is used to calculate clawbacks, some tax 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 the exchange rate at the time of the purchase, or at the time of becoming a Canadian resident.  The proceeds must be converted to Canadian $ at the time of the disposition.  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.

Allowable Capital Loss

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.

Capital Losses / Inclusion Rate on the Notice of Assessment

If you have unused net capital losses from previous years, the amount will be shown on your latest assessment notice from CRA.  The amount shown on the assessment notice is the net capital loss.  In order to use some or all of these losses on the current year tax return, you would claim the amount of the net capital loss on line 25300 of your tax return.  This amount claimed cannot exceed the amount of taxable capital gains that you are showing on line 12700 of your return.

Your assessment notice should indicate if your inclusion rate differs from the current inclusion rate.  For 2000, where there were 3 different rates, your assessment notice should show a combined inclusion rate for all net capital losses of that year.

Capital Gains & Capital Losses in the TaxTips.ca Detailed Tax Calculator

Inclusion Rate for Net Capital Losses Carried Forward

If the inclusion rate from your net capital losses carried forward from previous years is different from the current year inclusion rate, you will have to adjust the amounts to the current year inclusion rate in order to input the net capital loss amount into the Detailed Canadian Tax & RRSP Savings Calculators.  The formula for converting prior net capital losses is

   Prior net capital loss  ÷   Prior IR   x Current IR

Example: if your net capital loss with a 50% inclusion rate was $3,000, and you are using this to offset taxable capital gains with an inclusion rate of 2/3^rds, the adjusted net capital loss to use would be 

$3,000 ÷ 0.5 x 2/3 = $6,000 x 2/3 = $4,000. Simpler version: $3,000 x 4/3 = $4,000.

The $4,000 would be entered on line 25300 of your tax return, as long as your taxable capital gains on line 12700 are at least $4,000.

2024 Inclusion Rate for Net Capital Losses Carried Forward

The inclusion rate to apply to capital losses for 2024 will be an average inclusion rate.  To calculate the average inclusion rate, the formula is:

Total taxable capital gains for 2024 ÷ total capital gains for 2024.

Example:

Therefore, to deduct a net capital loss of $10,000 carried forward that had an inclusion rate of 50%, the formula is $10,000 ÷ 0.5 x 51.39% = $10,278.

If you have net capital losses carried forward from 1985 and earlier years, special rules apply.  The CRA guide T4037 Capital Gains has a section regarding how to apply your net capital losses of other years to the current tax year, which includes information on pre-1986 losses.

To convert prior year Net Capital Losses to reduce Taxable Capital Gains:

The following table shows how a Net Capital Loss of $10,000 would be converted to be offset against a taxable capital gain at the above inclusion rates.

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 Other Years (Archived) paragraph 30, and T4011 Preparing Returns for Deceased Persons Chapter 5 - Net Capital Losses.

If after the death of a taxpayer it is discovered that there were capital losses that were not reported on the tax return, see Claiming Capital Losses Not Previously Reported on the Tax Return.

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 circumstances.  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 losses occurred.  This applies even when the losses exceed the gains, and cannot be used in the current year.  These losses will then be available to use in a future 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 net capital losses to prior years, you would file form T1A - Request for loss carryback with your tax return.  This can usually be done within income tax software.

If you want to revise a previous year's return in which you should have reported capital losses, you would file form T1Adj.  See our article on changing your tax return.

Claiming Capital Losses Not Previously Reported on the Tax Return

If a taxpayer has failed to report capital losses on their tax return, they can still claim them, as long as a request to do this is made within 10 years. See Technical Interpretation (TI) 2023-0961311C6, where part of the CRA response includes the following:

A net capital loss exists independently of whether or not it is reported in the tax return for the taxation year when it was incurred. ...

In the situation where a legal representative of the deceased discovers that an allowable capital loss was incurred in a particular taxation year that is not open for reassessment because its normal reassessment period has expired, relief may be available if no Notice of Determination under subsection 152(1.1) or (1.11) was issued with respect to the net capital loss of the particular taxation year.

The TI goes on to describe the situation of a deceased taxpayer with unreported capital losses, and provides an example of how at least part of these losses could be claimed.

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:

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 Capital Gains Can Increase Your OAS Clawback - even if you have net capital losses carried forward that will completely eliminate the taxable capital gains.

Tax Tip:

It may be better for tax purposes to offset your capital losses with capital gains instead of carrying them forward, if possible!  That is, if you have investments with unrealized gains, sell some to offset the losses.

Joint Owners of Capital Property

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. 

CCPC and Capital Dividend

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.

Reduction or Deferral of Capital Gains

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

1994 Capital Gains Election

Prior to 1994 there was a $100,000 capital gains exemption which could be used for all capital gains.  On February 22, 1994, the federal government announced that the exemption would no longer be available for capital property or eligible capital property sold after February 22, 1994.

A one-time election was made available to allow those who owned capital or eligible capital property at February 22, 1994, to report a capital gain on their 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, and you may have had to also complete forms T657, Calculation of Capital Gains Deduction on All Capital Property, and Form T936, Calculation of Cumulative Net Investment Loss (CNIL) to December 31, 1994.  It was possible that not all of the declared capital gain would be exempt, depending on the CNIL balance.

Once form T664 was completed for a real estate property, the new adjusted cost base was entered on the Capital Gains Election Supplementary page, in Chart B - Other Capital Properties.  When spouses completed this election for a property of which they each owned 50%, such as a vacation home 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 base for the property.

More information on the 1994 election is available in the 1994 Capital Gains Election Package (pdf).

TaxTips.ca Resources

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

Superficial Losses and Other Disallowed Losses

Transfer Capital 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

Canada Revenue Agency (CRA) Resources

Capital Gains Guide T4037

Tax Tip:

Only 50% (2/3^rds 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: December 23, 2024