Capital gains — the 50% inclusion rate explained
Meaning of taxable capital gain and allowable capital loss
Section 38 defines a "taxable capital gain" as one-half of a capital gain, and an "allowable capital loss" as one-half of a capital loss. Only this taxable half flows into income under s.3.
Plain-language explanation
Section 38 is the provision that makes capital gains tax-advantaged relative to employment income. A capital gain is multiplied by the inclusion rate before it enters your taxable income. At the current 50% rate, only half of your gain is taxable.
How it works: - You sell shares for $100,000 that you paid $40,000 for. Your capital gain is $60,000. - Under s.38(a), your *taxable capital gain* is 50% × $60,000 = $30,000. - That $30,000 flows into your income under s.3(b) and is taxed at your marginal rate. - If your combined marginal rate is 46%, your actual tax on the gain is $30,000 × 46% = $13,800 — an effective rate of 23% on the original $60,000 gain.
The proposed 2/3 rate (2024 budget) was not enacted: The April 2024 federal budget proposed raising the inclusion rate to 2/3 (66.67%) for gains above $250,000. This would have taken effect June 25, 2024. However, the minority Liberal government fell before the bill passed, and the incoming Conservative government announced in March 2025 that it would not proceed with the increase. The inclusion rate remains 1/2 for all capital gains in 2024, 2025, and 2026.
Capital losses: Under s.38(b), an *allowable capital loss* is also 50% of an actual capital loss. Allowable capital losses can only be deducted against taxable capital gains — they cannot reduce employment or business income.
Example
Kim sold a rental property in 2026 with a capital gain of $200,000. Her taxable capital gain is $100,000 (50%). At a 46% combined marginal rate, she pays $46,000 in tax on the $200,000 gain — an effective rate of 23%.
Amendment history
Significant changes to this provision. Older versions help you understand rules that applied in prior tax years.
2024 federal budget proposed raising inclusion rate to 2/3 on gains above $250,000 annually for individuals, effective June 25, 2024.
Before
1/2 (50%) for all capital gains
After
Proposed 2/3 for gains above $250,000 annually; 1/2 on first $250,000
Incoming government announced it would not proceed with the 2/3 inclusion rate. Inclusion rate confirmed at 1/2 for all years.
Before
Proposed 2/3 increase (not yet enacted)
After
1/2 (50%) confirmed — no change
Common questions
What is the capital gains inclusion rate in Canada for 2026? +
The inclusion rate is 50% for all individuals in 2026. The proposed 2/3 rate from the 2024 budget was not enacted — the incoming government confirmed in March 2025 that the rate remains at 1/2.
Can capital losses reduce my employment income? +
No. Allowable capital losses (50% of actual losses) can only be applied against taxable capital gains. If your capital losses exceed your gains in a year, the excess is a net capital loss that carries back 3 years or forward indefinitely — but only against capital gains.
Are all assets subject to capital gains tax? +
No. Your principal residence is generally exempt (s.54). Personal-use property (furniture, car) is exempt unless it is listed personal property (art, jewellery, coins, stamps, rare books — LPP has special rules). TFSA and RRSP gains are sheltered within the registered plan.
Key terms
Related sections
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Related guides
Source: Income Tax Act, RSC 1985, c. 1 (5th Supp.), section 38. — Read the official text on Justice Canada
These summaries are for educational purposes only and do not constitute legal or tax advice. Speak with a CPA for advice on your specific situation.