Capital Gains Tax in Canada: Inclusion Rates and TFSA Sheltering

Canada uses an inclusion rate system. For the first $250,000 of capital gains in a year, 50% of the gain is added to your taxable income. For gains above $250,000, the inclusion rate increases to 66.67% (effective June 25, 2024). This higher rate applies primarily to high-net-worth investors and corporations.

Example: You sell shares for a $10,000 gain. At 50% inclusion, $5,000 is added to your income and taxed at your marginal rate. If your combined federal-provincial marginal rate is 40%, you owe $2,000 in tax — an effective rate of 20% on the full gain.

The TFSA is the ultimate capital gains shelter. Any gains inside a TFSA — whether from ETFs, stocks, or GICs — are never taxed, not even on withdrawal. This is why maximising TFSA contributions before non-registered investing is almost always the correct strategy for Canadians.

Your principal residence is exempt from capital gains tax in Canada. This is a significant benefit that makes homeownership one of the most tax-efficient wealth-building strategies — though the exemption applies only to one property at a time and must be designated on your tax return.

Tax-loss harvesting — selling underperforming investments to realise a capital loss that offsets gains elsewhere — is a useful year-end strategy in non-registered accounts. The superficial loss rule prevents you from repurchasing the same or identical security within 30 days.