As a small business owner, you probably hear about “capital gains” now and then — especially if you’ve invested in stocks, real estate, or are thinking of selling your business. With all the talk about tax changes in recent federal budgets, I’ve had many clients asking what’s happening with capital gains taxes, and what it means for them.
In this blog, I’ll walk you through what capital gains are, how they’re taxed in Canada, recent updates on tax changes, and how it all affects you — whether you’re selling investments, rental property, or even your business.
What Is a Capital Gain?
A capital gain happens when you sell an asset for more than what you paid for it. This applies to things like stocks, real estate, and even your business. On the flip side, if you sell something for less than you paid, you have a capital loss.
You only need to worry about capital gains tax when the asset is sold — simply holding onto an asset that has gone up in value doesn’t trigger tax.
How Are Capital Gains Taxed?
Currently in Canada, only 50% of a capital gain is taxable. This means if you make a $10,000 profit from selling an asset, only $5,000 is added to your taxable income. The actual tax you pay depends on your income bracket for the year.
Capital losses work the same way in reverse mode. You can use 50% of a capital loss to offset any capital gains in the same year. If your losses are more than your gains, you can carry the losses back up to 3 years or forward up to 20 years to offset gains in other years.
What’s Changing with Capital Gains in Canada?
In the 2024 federal budget, the government proposed increasing the inclusion rate (the portion of a capital gain that’s taxable) from 50% to 66.67% for:
- Individuals with more than $250,000 in capital gains in a year
- All corporations
- Most trusts
The change was originally set to take effect on June 25, 2024, but has now been pushed to January 1, 2026.
So, for now, nothing has changed — we’re still at the 50% inclusion rate. But it’s a good time to start planning if you think you might sell high-value assets after 2025.
Selling Your Business: What About the Lifetime Capital Gains Exemption?
If you’re thinking of selling shares of your incorporated business, there’s some potentially good news. Lifetime Capital Gains Exemption (LCGE) can shelter up to $1.25 million in capital gains from tax — but only if you meet the criteria.
To qualify, your business must be a Canadian-controlled private corporation (CCPC), and at least 50% of its assets must be used in active business operations (not just holding investments). These conditions must be met by at least 24 months before the sale.
Keep in mind, the exemption is a lifetime amount. So, if you’ve used it partially in the past, your available limit will be reduced.
This exemption can be a huge tax break, so if you’re planning to sell your business, it’s worth speaking to a professional to see if you qualify.
Do You Pay Capital Gains Tax When You Sell Your Home?
If the property is your principal residence, you’re usually exempt from paying capital gains tax. However, you must report the sale on your tax return to claim the exemption.
There’s a catch: if you owned the home for less than 12 months, the CRA may not allow you to use the principal residence exemption. And if you rented part of the home, or used it for business, there could be partial taxes owing.
If you sell a rental property, vacation home, or investment property — that’s a different story. These are subject to capital gains tax like any other investment.
How Do You Calculate a Capital Gain?
It’s straightforward:
Capital Gain = Selling Price – Adjusted Cost Base (ACB) – Selling Expenses
The ACB is what you originally paid for the asset, plus any expenses related to acquiring it (legal fees, commissions, etc.).
If you sell for more than the ACB, you have a gain. If less, a loss. Just remember, only 50% of the gain or loss is reported on your return (at least until 2026).
Keeping Records: How Long Do You Need to Hang On to Tax Documents?
As a professional bookkeeper, I always remind clients that good recordkeeping is key — especially when it comes to capital gains. The CRA requires you to keep all tax-related documents for six years from the end of the tax year they relate to. So, in practice, you’re often keeping records for almost seven years.
This includes:
- Purchase and sale agreements
- Receipts for legal fees, commissions, and improvements
- T-slips (like T5008 for investment sales)
- Any correspondence related to the transaction
If you’re filing electronically, don’t throw away your receipts! The CRA may ask for proof at any time.
Pro Tip: Selling an Asset Soon? Talk to a Professional
The proposed changes to capital gains tax in 2026 could affect your tax bill significantly — especially if you’re selling a business, rental property, or have major investment gains.
A well-timed sale (before 2026) could save you money. Or, it might make more sense to defer a sale, depending on your situation. Either way, having a tax advisor or professional bookkeeper review your numbers and help you plan can make a big difference.
In Summary
Capital gains are a normal part of investing and owning a business — and understanding how they’re taxed can help you make better financial decisions.
Here are the key takeaways:
- 50% of capital gains are currently taxable — this rate is increasing to 66.67% in 2026 for certain individuals and entities.
- The Lifetime Capital Gains Exemption (LCGE) can shelter up to $1.25M in business gains if you meet the criteria.
- Sales of your principal residence may be tax-free, but rental and vacation properties are taxable.
- Accurate records are essential and must be kept for at least six years.
- Always check with a tax professional before making major decisions — especially when the rules are changing.
Have questions about how capital gains tax applies to your business or investments? Feel free to reach out — as a professional bookkeeper who works closely with small business owners, I’m happy to help you understand your numbers and stay tax-compliant.
