Taxable Capital Gains and Allowable Capital Losses – The 2025 Canadian Guide

1. Introduction – why this guide matters

Selling a rental condo, mutual fund units, crypto, or even a comic-book collection can add unexpected tax to your spring bill. Canada’s Income Tax Act uses Sections 38 and 39 to decide exactly how much of a gain is taxable and how much of a loss you can deduct.

The rules sound complicated because the Act must cover everything from stock-market trades to gifts of rare artwork. This plain-language post explains each major rule with easy examples so you can calculate your own result or know what to ask your tax professional.

2. Key terms you must know

• Capital property – something you buy mainly to earn or grow value over time, not for day-to-day business use. Common examples: stocks, bonds, rental real estate, cottages, cryptocurrency held as an investment, and personal valuables such as gold coins.
• Adjusted cost base (ACB) – what the property cost you, plus certain fees and improvements, minus some returns of capital.
• Proceeds of disposition – the amount you receive when you sell or are deemed to sell (for example on death).
• Capital gain – proceeds minus ACB and any selling costs, when the result is positive.
• Capital loss – the same calculation when the result is negative.
• Inclusion rate – the percentage of a capital gain that you must include in income. Since 2000 the rate has been fifty per cent for most transactions.
• Allowable capital loss – the fraction of a capital loss that can offset taxable capital gains. At today’s inclusion rate the fraction is also fifty per cent.
• Net capital loss – an allowable capital loss that cannot be used in the current year.
• Qualified donee – a charity or other organization approved by the Canada Revenue Agency to issue tax receipts.
• Flow-through shares – a special investment that passes resource-sector deductions to investors.

3. How capital gains and losses fit into your tax return

Capital gains and losses are not regular income. They are reported on Schedule 3 of the T1 return or on Schedule 6 of the T2 corporate return and then flow into line 12700 (individual) or line 113 (corporation).

Basic flow for individuals:

1. List every disposition on Schedule 3 with proceeds, ACB, and selling costs.
2. Subtract to find each gain or loss.
3. Combine gains and losses to reach a net capital gain or net capital loss.
4. Multiply any net gain by the inclusion rate (currently fifty per cent).
5. Move that taxable capital gain to line 12700.

If losses are bigger than gains the excess is a net capital loss. You cannot use a net capital loss against salary or business income, but you can:

• carry it back three years, or
• carry it forward indefinitely to future years.

4. The inclusion rate – why only half is usually taxed

Section 38 paragraph (a) sets the basic rule: taxable capital gain equals one-half of the actual gain. Paragraph (b) gives the mirror image: allowable capital loss equals one-half of the actual loss. Using a one-half rate means you pay tax on only fifty per cent of the profit and can deduct only fifty per cent of the loss.

The federal government can change the inclusion rate at any time. Watch each spring budget for updates. If the rate changes, only future sales are affected. Existing unused losses are automatically scaled so they remain fully usable.

5. Step-by-step: calculating a capital gain

Example – selling shares

• In 2021 Mia bought 300 shares of Maple Motors for $20 each. Her total cost, including a $30 commission, was $6 030.
• On 12 April 2025 she sold all 300 shares for $35 each and paid a $45 selling commission.

1. Proceeds: 300 × $35 = $10 500
2. Selling costs: $45
3. Net proceeds: $10 500 – $45 = $10 455
4. ACB: $6 030
5. Capital gain: $10 455 – $6 030 = $4 425
6. Taxable capital gain: $4 425 × 50 % = $2 212.50
7. Mia reports $2 212.50 on line 12700 of her 2025 return.

6. Step-by-step: calculating a capital loss

Example – selling crypto

• Leo bought one bitcoin in January 2022 for $70 000 including fees.
• He sold it in March 2025 for $45 000 after fees.

1. Proceeds: $45 000
2. ACB: $70 000
3. Capital loss: $45 000 – $70 000 = –$25 000
4. Allowable capital loss: $25 000 × 50 % = $12 500

If Leo has no taxable capital gains in 2025 the $12 500 becomes a net capital loss. He can:

• carry it back to offset gains in 2022, 2023, or 2024 (form T1A), or
• carry it forward indefinitely.

7. What is an allowable business investment loss (ABIL)

An ABIL is a special type of allowable capital loss that comes from:

• a share of a small business corporation, or
• a debt owed by a Canadian-controlled private corporation.

Only half of the loss is an ABIL, but unlike a normal capital loss the ABIL can offset any type of income – salary, interest, or business profit – in the current year. Unused ABILs that move to other years revert to regular capital-loss treatment.

8. Special zero-tax gifts and ecological property rules

Paragraphs (a.1) and (a.2) of Section 38 reward certain donations:

• Gifts of publicly listed shares, mutual-fund units, or certain bonds to a qualified donee result in zero taxable capital gain.
• Gifts of certified ecological lands or easements to a qualified donee (but not a private foundation) also produce zero taxable capital gain.

You must still report the disposition on Schedule 3, but the inclusion rate is zero. These rules make donating securities directly far more tax-efficient than selling first and donating cash.

9. Flow-through shares, mark-to-market, and other advanced points

• Flow-through shares can pass resource deductions to investors. Section 38.1 and Section 40 contain complex “exemption threshold” adjustments that limit double tax benefits when shares are transferred within a family or donated.
• Derivatives held by financial institutions may be reported under mark-to-market rules in Section 10.1. Gains look like ordinary profit, not capital.
• Foreign currency gains under Section 39(1.1) let individuals ignore the first $200 of annual gains or losses from personal foreign-currency cash or credit-card payments. Business-related currency gains always remain fully reportable.
• Canadian securities election under Section 39(4) lets a trader choose to treat all Canadian securities as capital property, avoiding the risk of being taxed as business income. Day traders and corporations in the financial sector cannot make this election.

Most small investors never touch these advanced items, but knowing they exist helps you ask the right questions if a transaction looks unusual.

10. Carrying capital losses back and forward

• Carry-back: Use form T1A (individual) or Schedule 4 (corporation) to apply a current-year net capital loss against taxable capital gains of any of the three previous tax years.
• Carry-forward: Any net capital loss you do not use simply stays on CRA’s system. It can offset future taxable capital gains forever.

Check your latest Notice of Assessment under “Net capital losses available for carry-forward.”

11. Capital gains versus business income – the CRA tests

Selling the same type of asset over and over may flip your gains from capital to business income. The CRA looks at:

1. Intention at purchase – were you planning to resell quickly for profit?
2. Frequency of transactions – one-time sale versus daily trading.
3. Duration of holding – days or weeks suggest business.
4. Level of promotion or effort – staging homes, advertising, issuing prospectuses.
5. Financing and leverage – short-term loans to carry inventory resemble business.

Business income is fully taxable and business losses can offset any income, but GST/HST and payroll rules may also apply, so classify carefully.

12. Planning tips before you sell

1. Use the capital gains exemption – Up to $1 016 836 (2025 indexed limit) of gains on qualified small business corporation shares can be tax-free if you meet strict tests. Check purification and holding-period rules at least two years before a planned sale.
2. Offset gains with losses – Sell losing investments before 31 December to lower current-year tax. Beware of superficial-loss rules if you repurchase within 30 days.
3. Donate winning stocks – Gift publicly traded securities to your favorite charity to erase the gain and claim a donation credit.
4. Crystallize the principal-residence exemption – If you plan to move out and turn your home into a rental, file the Section 45(2) election to lock in a tax-free gain up to the date of change.
5. Plan instalments – Big capital gains may push you into quarterly-instalment territory the next year. Set cash aside.

13. Frequently asked questions

Q1. I sold a used car for more than I paid. Is that a capital gain?
No. A personal-use property loses value over time and its original cost may be adjusted for part disposition rules, but gains under $1 000 are usually zero after CRA’s “personal-use property exemption.”

Q2. I traded cryptocurrency twenty times this year. Are those gains capital or business?
If you trade frequently with a profit motive and little long-term holding period, CRA may view you as running a business. Keep detailed records and ask a professional.

Q3. Can I apply an unused net capital loss against my spouse’s gain?
No. Losses can move only within the same taxpayer except on death, when they can offset a spouse’s future capital gains if certain elections are made.

Q4. My TFSA made a big gain on stocks. Is it taxable?
No. Gains inside a TFSA are tax-free. However, if you over-contribute or run a day-trading business inside a TFSA, CRA can assess penalties and even tax the income.

14. Year-end checklist

• Gather brokerage statements and crypto-exchange CSV files.
• Verify adjusted cost base for each holding; add any DRIP purchases and reinvested dividends.
• Perform an inventory of personal-use property sold during the year.
• Review charitable donation plan – consider gifting securities.
• Run a trial gain-loss summary in November; sell losers if needed.
• Confirm principal-residence eligibility if you disposed of real property.
• Make any required instalment payment by 15 December.

15. Final thoughts and where to get help

Capital-gain rules reward long-term investors with a lower tax rate, but they also punish sloppy record-keeping. Keep every trade slip, respect CRA deadlines, and think about taxes before you click “sell.”

Need personal advice? The team at BOMCAS Canada helps individuals and businesses across the country prepare accurate returns, plan transactions, and respond to CRA reviews.

Call us at 1-780-667-5250 or visit bomcas.ca to book a consultation.