Capital gain
A capital gain is the profit realised when you dispose of a capital asset for more than its adjusted cost base, of which only a portion is included in taxable income.
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Key facts
| Category | Personal tax |
|---|---|
| Reported on | T1 Schedule 3; TP-1 Schedule G in Québec |
| Computed as | Proceeds of disposition, less adjusted cost base, less costs of disposition |
| Triggered by | Sale, gift, emigration, death, or change of use |
| Losses | Allowable capital losses offset taxable capital gains only |
| Authority | Canada Revenue Agency; Revenu Québec |
What it means in practice
Only a fraction of a capital gain is taxable — the inclusion rate — which is what makes capital gains lighter than ordinary income. The rate is set by legislation and has changed several times, so check the current rate for the year in question rather than assuming. Capital losses can only be applied against capital gains: back three years, or forward indefinitely. They cannot shelter employment or business income. Whether a transaction produces a capital gain at all depends on intent and pattern. Frequent buying and selling — of property or securities — can be recharacterised as business income and taxed in full.
Dispositions that are not sales
A disposition does not require money to change hands. Gifting an asset, emigrating from Canada, dying, or converting a property from personal use to income-earning use all trigger a deemed disposition at fair market value, with the gain calculated as if you had sold. A change of use is the one that surprises homeowners: moving out of a principal residence and renting it out is a deemed disposition of the whole property at market value, unless an election is filed to defer it. Transfers between spouses roll over at cost automatically, so no gain arises on the transfer — but the income and any later gain are generally attributed back to the transferring spouse.
When a gain is really business income
Not every profit on an asset sale is a capital gain. Where the intention at purchase was resale at a profit, the profit is business income and fully taxable rather than a capital gain. The CRA weighs the length of ownership, the frequency of similar transactions, the nature of the asset, the effort put into making it saleable, and any financing that only made sense on a quick resale. Assignment sales of pre-construction condominiums and short-hold property flips are the fact patterns most often reassessed on this basis.
FAQ
Can I use a capital loss against my employment income?
Do I report a gain if I did not receive the money?
Need this applied to your situation?
A definition only gets you so far. Talk to a Montréal CPA about what this means for your return — in English or French.