What is capital gains tax and how does it work in Canada?

Capital gains tax in Canada is governed by the federal Income Tax Act, not provincial law. When you sell a capital property — such as stocks, investment real estate, or a business interest — for more than you paid, the profit is a capital gain. Only a portion of that gain is included in your taxable income; that portion is called the inclusion rate.

Historically, the inclusion rate has been set at one-half, meaning half of your capital gain is added to your income and taxed at your marginal rate. The federal government has the power to change the inclusion rate through legislation, so you should confirm the current rate with a tax professional before planning a disposition.

Ontario residents also pay provincial income tax on top of federal tax, so your combined marginal rate on included gains can be significant. There is no separate "capital gains tax" form; the gain flows through your T1 personal income tax return. A lawyer or accountant can help you understand whether a transaction will trigger a gain and what strategies, like timing of the sale, may be available.