What is the Lifetime Capital Gains Exemption in Canada?

The Lifetime Capital Gains Exemption (LCGE) allows Canadian individuals to exempt up to $1,250,000 (2026) in capital gains on the sale of Qualifying Small Business Corporation (QSBC) shares and qualified farm or fishing property. This exemption can eliminate significant tax on a business sale — proper bookkeeping and corporate structure are essential to qualify.

Tax Guide · Updated May 2026

Capital Gains Tax Canada 2026

Q: What is the capital gains tax rate in Canada 2026?

Canada does not have a separate capital gains tax rate. Instead, a portion of your capital gain — called the inclusion rate — is added to your regular income and taxed at your marginal tax rate. For individuals, the 2026 inclusion rate is 2/3 (66.67%) on gains over $250,000 (50% on the first $250,000). For corporations and trusts, the inclusion rate is 2/3 on all gains.

Q: How do I calculate a taxable capital gain in Canada?

Taxable capital gain = (Proceeds of disposition − Adjusted Cost Base − Selling expenses) × inclusion rate. For example: you sell shares for $100,000 that cost $60,000. Capital gain = $40,000. Taxable capital gain = $40,000 × 50% = $20,000 (if you are an individual under the $250,000 threshold). This $20,000 is added to your income and taxed at your marginal rate.

Q: Do I have to report capital gains to the CRA?

Yes. All capital gains — including gains on the sale of shares, real property, cryptocurrency, and business assets — must be reported on Schedule 3 of your personal tax return (T1) or on Schedule 6 of a corporate return (T2). Even gains sheltered by the principal residence exemption must be reported since 2016.

Q: Can capital losses offset capital gains in Canada?

Yes. Capital losses can be applied against capital gains in the same year. Net capital losses can also be carried back 3 years or carried forward indefinitely to offset future capital gains. They cannot be used to offset regular income — only other capital gains.

How Canadian capital gains tax works — inclusion rates, the Lifetime Capital Gains Exemption, CRA reporting rules, and what business owners need to track for a clean sale.

Quick Answer

Canada taxes 50%–66.67% of a capital gain (called the "inclusion rate"), which is then added to your regular income and taxed at your marginal rate. There is no flat capital gains tax rate — your actual tax depends on your total income and province. Individuals pay 50% on the first $250,000 of gains per year, and 2/3 on gains above that. Corporations always pay 2/3.

Capital Gains Inclusion Rate 2026

The inclusion rate determines how much of your gain is added to taxable income.

Who	Gain Amount	Inclusion Rate	Taxable Portion
Individual	First $250,000/year	50%	$125,000 on a $250,000 gain
Individual	Above $250,000/year	66.67%	$66,670 per $100,000 of excess gain
Corporation	All gains	66.67%	No $250K threshold for corps
Trust	All gains	66.67%	Same as corporations

Example: Selling Shares

You sell company shares for $200,000. You paid $80,000 (adjusted cost base). Selling fees: $2,000.

Capital gain: $200,000 − $80,000 − $2,000 = $118,000
Inclusion rate (individual, under $250K): 50%
Taxable capital gain: $118,000 × 50% = $59,000
Tax owed (at 40% marginal rate): $59,000 × 40% = $23,600

What Triggers a Capital Gain in Canada?

Capital gains arise on the disposition of capital property — broadly, any sale, gift, or deemed sale.

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Shares & Investments

Sale of publicly traded or private company shares, mutual funds, ETFs, and bonds above your adjusted cost base.

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Real Estate

Investment properties, rental properties, cottages, and any property that is not your principal residence.

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Cryptocurrency

CRA treats crypto as property. Selling, trading, or using crypto to purchase goods/services triggers a capital gain or loss.

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Business Asset Sales

Selling goodwill, equipment at a gain, or other eligible capital property when winding down or selling a business.

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Gifts & Transfers

Gifting property to a non-spouse is a deemed disposition at fair market value — a gain may apply even with no cash exchanged.

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Death (Deemed Disposition)

At death, CRA deems all capital property sold at fair market value. Estate planning is critical to minimize this exposure.

Lifetime Capital Gains Exemption (LCGE)

Canadian business owners may qualify to shelter up to $1,250,000 in capital gains from tax entirely.

2026 LCGE Limits

QSBC Shares $1,250,000

Qualified Farm Property $1,250,000

Qualified Fishing Property $1,250,000

Key Qualifying Tests for QSBC

✓ 90% test: At sale, 90%+ of fair market value of corporation's assets must be used in an active business carried on primarily in Canada
✓ 50% test: For 24 months prior to sale, 50%+ of assets must be used in an active business in Canada
✓ 24-month holding: Shares must have been owned by you (or related person) for 24+ months
✓ Canadian-controlled private corporation (CCPC) at time of sale

Why Bookkeeping Matters for LCGE

The 90% and 50% asset tests require precise records of business assets vs. passive assets (investments, excess cash, personal property held in the corp). If your books aren't clean, you risk failing the test at the worst possible time — during a business sale. Good bookkeeping now protects your exemption later.

Capital Losses in Canada

A capital loss occurs when you sell a capital asset for less than its adjusted cost base. Losses can offset gains.

Loss Type	How Far Can It Travel?	What Can It Offset?
Net capital loss (current year)	Carry back 3 years	Capital gains only
Net capital loss (prior years)	Carry forward indefinitely	Capital gains only
Allowable Business Investment Loss (ABIL)	Carry back 3 / forward 10 years	Any income (special exception)

Watch for Superficial Loss Rules

If you sell a security at a loss and repurchase the same (or identical) security within 30 days before or after the sale, the loss is deemed a "superficial loss" and is denied by the CRA. The denied loss is added to the cost base of the repurchased security instead.

Principal Residence Exemption

Your primary home is usually fully exempt from capital gains tax — but you must still report it.

The Principal Residence Exemption (PRE) shelters all or part of the capital gain on the sale of a home you or your family designated as your principal residence. The exemption formula is:

Exempt portion = Capital gain × (Years as principal residence + 1) ÷ Total years owned

Key rules:

You must report the sale on Schedule 3 of your T1, even if fully exempt (since 2016)
Only one property per family unit per year can be designated
If you rented your home, only the years it was your principal residence are exempt
A change in use (personal → rental) triggers a deemed disposition

How to Report Capital Gains to the CRA

Capital gains must be reported annually — even if partially or fully exempt.

Individuals (T1 Return)

1 Gather all T5008 slips from brokers (reports proceeds of securities dispositions)
2 Complete Schedule 3 listing each disposition, cost base, proceeds, and gain/loss
3 Net capital gains flow to Line 12700 of your T1
4 Claim the LCGE on Schedule 3 and Form T657 if eligible

Corporations (T2 Return)

1 Record all dispositions in your corporate books throughout the year
2 Complete Schedule 6 of the T2 for capital gains and losses
3 Taxable capital gain flows to Schedule 1 for tax calculation at 2/3 inclusion rate
4 Track capital dividend account (CDA) — the non-taxable portion can flow out tax-free to shareholders

Effective Capital Gains Tax Rate by Province

Combined federal + provincial marginal rates on capital gains for the highest income bracket (2026 estimates):

Province	Top Marginal Rate	Effective Cap Gains Rate (50% inclusion)
Ontario	53.53%	26.77%
British Columbia	53.96%	26.98%
Alberta	48.00%	24.00%
Manitoba	50.40%	25.20%
Saskatchewan	47.50%	23.75%
Nova Scotia	54.00%	27.00%
New Brunswick	52.50%	26.25%
PEI	51.37%	25.69%
Newfoundland	54.80%	27.40%

Rates shown at 50% inclusion (first $250K/year for individuals). Rates on gains above $250K are approximately 1/3 higher.

Planning a Business Sale? Start Your Books Now.

The Lifetime Capital Gains Exemption requires clean, accurate books going back 24 months. The time to prepare is before you start talking to buyers — not after. Our full-cycle bookkeeping and tax preparation services help Canadian business owners maximize their exemption.

Book a Free Consultation Tax Preparation Services

Capital Gains Tax Canada — FAQs

What is the capital gains tax rate in Canada 2026?

Canada has no flat capital gains tax rate. Instead, 50% (or 66.67% above $250,000 for individuals) of a capital gain is included in taxable income, then taxed at your marginal rate. The effective rate on capital gains ranges from roughly 23–27% depending on your province and income.

How do I calculate a taxable capital gain in Canada?

Formula: (Proceeds − Adjusted Cost Base − Selling Costs) × Inclusion Rate. For an individual with $100,000 proceeds, $60,000 ACB, and $2,000 in fees: gain = $38,000; taxable = $38,000 × 50% = $19,000.

What is the Lifetime Capital Gains Exemption?

The LCGE allows individuals to shelter up to $1,250,000 (2026) in capital gains on Qualifying Small Business Corporation (QSBC) shares, qualified farm property, or qualified fishing property from all capital gains tax. Proper bookkeeping is required to pass the qualifying tests.

Do I have to report capital gains to the CRA?

Yes. All capital gains — including gains sheltered by the principal residence exemption — must be reported on Schedule 3 of your T1 personal return, or Schedule 6 of a T2 corporate return. Failure to report can result in CRA penalties and interest.

Can capital losses offset capital gains in Canada?

Yes. Net capital losses in the current year can be carried back 3 years or carried forward indefinitely to offset future capital gains. They cannot reduce regular employment or business income — only other capital gains (with the exception of Allowable Business Investment Losses).