Capital gains tax in Canada, explained

A capital gain is the profit you make when you sell (or are deemed to have sold) a capital property — a stock, ETF, mutual fund, cryptocurrency, or real estate — for more than it cost you. A capital loss is the reverse. In Canada, capital gains are taxed differently, and more favourably, than employment or interest income: only a portion of the gain is included in your taxable income.

The gain itself is straightforward in principle:

Capital gain = Proceeds of disposition − Adjusted cost base − Outlays and expenses

The difficulty is almost never the subtraction. It is getting the adjusted cost base right — which is where most reporting errors come from.

You are not taxed on the whole gain. Only the taxable portion — the gain multiplied by the inclusion rate — is added to your income and taxed at your marginal rate. Historically the inclusion rate has been one half, so a $10,000 gain adds $5,000 to your taxable income.

Because the inclusion rate has been the subject of recent policy change, always confirm the rate that applies for the tax year you are filing. The mechanics do not change: net your gains against your losses first, then apply the inclusion rate to the net.

To compute the gain on a sale you need three numbers:

• Proceeds of disposition — what you received on the sale, in Canadian dollars.
• Adjusted cost base (ACB) — the pooled average cost of the units you sold, including commissions and every adjustment (DRIPs, return of capital, splits, FX).
• Outlays and expenses — costs incurred to make the sale, such as the selling commission.

Subtract the ACB and outlays from the proceeds. If you hold the same security in more than one account, the CRA requires you to pool them and use one averaged cost base — you cannot cherry-pick which shares you sold.

Capital gains and losses are reported on Schedule 3, grouped by type of property. The net taxable gain from Schedule 3 flows to line 12700 of your T1 return. Your broker may also issue a T5008 reporting your dispositions — useful for proceeds, but its cost-base box is often blank or wrong, so you cannot simply copy it.

Registered accounts (TFSA, RRSP, RESP, FHSA) are not subject to capital-gains tax, so you only track and report gains in your non-registered (taxable) accounts.

• Reporting a zero or wrong cost base — e.g. copying a blank T5008 box, or forgetting the ACB of vested RSUs — which overstates the gain and overpays tax.
• Ignoring ETF distributions — reinvested (phantom) distributions raise your ACB and return of capital lowers it; miss them and you are taxed twice.
• Not pooling across brokers — the same stock at two brokers is one pool, not two.
• Tripping the superficial loss rule — claiming a loss while rebuying the same security within 30 days.