All the Numbers

Capital gains and the adjusted cost base

From the All the Numbers wiki · Investing

A capital gain is the amount by which what an investment sells for exceeds what it cost. In a non-registered account the gain is taxed when the investment is sold, not while it grows. Inside a TFSA a gain is never taxed, and inside an RRSP it is taxed only as the money is withdrawn, as ordinary income.

The rules

  • Half of a gain is taxable. The inclusion rate for individuals is 50%.[1] The proposed increase to two thirds above $250,000 was cancelled in March 2025.
  • The taxable half is added to other income and taxed at the person's own marginal rate, so the tax on a gain depends on the brackets it lands in; see marginal tax rates.
  • The adjusted cost base (ACB) is what the investment cost: the purchase price plus commissions and other costs of buying it.[2]
  • Identical investments are averaged. Shares or fund units of the same kind, held across all of a person's non-registered accounts, form one pool with one average cost per unit. A sale uses the average, not the price of a particular purchase.
  • The gain is proceeds of the sale, less the ACB of the units sold, less the costs of selling (commissions, legal fees).[3]
  • A reinvested distribution adds to the ACB of the units it buys. A return of capital from a fund or trust lowers it.[4] The ACB cannot go below nil: any shortfall is treated as a gain in that year and the ACB resets to nil.[5]

The formula

gain = proceeds − selling costs − (ACB × units sold ÷ units held)
taxable amount = gain × 50%

What the engine does

  • Keeps one pool per person for a non-registered account, with a unit count and an ACB. A contribution buys units at the current value; a withdrawal sells the units that amount is worth, at average cost. A withdrawal larger than the pool sells what is there and never overdraws.[6]
  • Takes the account's annual return as growth in the price of the units. Nothing is taxed until a sale, so the gain is realised in the month units are sold, and the tax on it settles with the return the following April.
  • Applies the 50% inclusion to the person's own bracket.[1] A loss is handled as described in capital losses.
  • Treats an ACB left blank as equal to the opening balance. That assumes no gain had accrued before the plan began, so tax on any earlier growth is left out, and the plan says so.[7] The account's cost-base field replaces this assumption when it is filled in.
  • Applies a separate gain rule to a home that is sold; see the principal residence exemption and selling a home.

What it deliberately does not

  • It does not tax unsold growth at the end of the plan, so net worth shows investments at full value with no tax set aside for a future sale.
  • It does not read T5008 slips or track purchases lot by lot. One pool, one average cost.
  • It does not model currency conversion on foreign holdings or corporate actions such as splits and mergers. Tax withheld abroad is covered in foreign withholding tax.

See also

  • Auto-allocation · When switched on, money left after spending and your own contributions is placed for you down a priority list — FHSA, then RRSP, then TFSA, then non-registered by default — each account taking what its room allows. Every dollar it moves is shown, by account, on each month and year.
  • Buying a cottage · A cottage is a second home for you and your family, kept alongside the home you live in. It can be bought with as little as 5% down if it is usable all year, or 10% if it is seasonal, but first-time buyer help, the Home Buyers' Plan and the FHSA cannot pay for it.
  • Capital cost allowance · Capital cost allowance (CCA) is the tax write-off for the building part of a rental property, at 4% of the remaining balance a year for most rental buildings. Claiming it can cost the principal-residence exemption on a rented home and creates recapture on a sale, so All the Numbers never claims it.
  • Capital losses and the superficial-loss rule · A loss on a non-registered investment first cancels capital gains in the same year; any excess carries back three years or forward without limit. A loss is denied if the same investment is bought back within 30 days.
  • Change of use · When part of a home starts to earn rent, tax law can treat that part as sold and bought back at market value. An election can postpone this for up to four years, and the cost of the property for a later write-off is set by a formula. All the Numbers applies it to a home you keep and rent out when you move; a suite is treated as a minor rental, so none of this applies to it.
  • Combined marginal tax rates · The marginal rate is the federal and Ontario tax on the next dollar of income. In 2026 it runs from 19.05% to 53.53% on ordinary income, and the top rate is lower on capital gains and dividends than on interest.
  • Expected returns and fees · The default return is 6.35% a year, nominal and net of fees, for an 80/20 stock and bond portfolio. It is an expected long-run average, not a forecast, and an account's own rate replaces it.
  • Foreign withholding tax · A foreign country can withhold tax from dividends paid to Canadians; for US dividends the treaty rate is 15%. The foreign tax credit recovers it in a non-registered account, but a TFSA gets no recovery and an RRSP is exempt.
  • Income tax brackets and your marginal rate · Federal and Ontario tax are each charged in slices of income at rising rates, then reduced by credits, with an Ontario surtax and health premium on top. The marginal rate is what the next dollar costs; the average rate is total tax over income.
  • Net worth, as the plan counts it · Net worth is everything the plan holds (cash, investment and registered accounts, homes at market value) minus mortgages, credit lines, debts and tax owing. It is not reduced for selling costs or for tax on money still in an RRSP.
  • Renting out part of your home · Suite income is taxable and its expenses are deductible on the rented portion, but renting can also limit the principal-residence exemption on the eventual sale. All the Numbers taxes the gain on the rented share when the home is sold, unless you tick that the rental needed no structural change and you claim no capital cost allowance; then the whole gain stays exempt.
  • Selling a home · A sale turns the home's projected market value into cash after selling costs (your province's typical commission, the sales tax on it and legal fees) and the mortgage payout. The gain on a principal residence is exempt from tax, apart from the part that was rented out when the exemption does not cover it.
  • Tax on the final return · What the plan's last year would owe in tax if the household died then, and how much of the savings would be left after it.
  • TFSA contribution room · Room starts accruing the year you turn 18, not the year you open an account, and it never expires. Withdrawals come back the following January. Limits past 2026 have not been announced, so the plan projects them by the rule the Act sets and says so.
  • The alternative minimum tax · A parallel tax calculation that applies a flat rate to a wider measure of income, so someone with a large capital gain cannot owe almost nothing. The higher of the regular and minimum tax is paid, and any extra is carried forward as credit.
  • The savings accounts at a glance · The TFSA, RRSP, FHSA, RESP, RRIF and non-registered account each have their own room, tax treatment and withdrawal rule. This page gives one short paragraph on each, with the entry that covers it in full.
  • Where the down payment comes from · The cash to close is assembled from the plan's projected balances in a fixed order — FHSA, TFSA, unregistered, HBP, then taxed RRSP — and each dollar is priced for what taking it costs.

References

  1. ↑CRA Guide T4037, Capital Gains 2025 ("The inclusion rate for 2025 is 50%"; 2/3 proposal cancelled per PM release 2025-03-21) · Capital gains inclusion rate (individuals) · 50% · effective 2001-01-01
  2. ↑CRA Guide T4037 ACB definition; land transfer tax per https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/rental-income/rental-expenses-you-cannot-deduct.html · ACB = purchase price + expenses to acquire (commissions, legal fees) + land transfer tax; capital improvements add, current expenses do not · effective 2025-01-01
  3. ↑CRA Guide T4037, Capital Gains — calculating your capital gain or loss · Capital gain = proceeds of disposition minus ACB and outlays and expenses incurred to sell (commissions, legal fees) · effective 2025-01-01
  4. ↑ITA 53(2)(h)(i.1) ("any amount that has become payable to the taxpayer by the trust... otherwise than as proceeds of disposition") · Return of capital from a trust or fund (T3 box 42) reduces the ACB of the units · See the source · effective 1988-01-01
  5. ↑ITA 40(3); s.54 "adjusted cost base" ("in no case shall the adjusted cost base... be less than nil"); T4037 Schedule 3 deemed gain · ACB is never below nil; the shortfall is a deemed capital gain and the ACB resets to nil · See the source · effective 1972-01-01
  6. ↑CRA — capital gains on shares and fund units are proceeds less adjusted cost base (average cost per unit) · An investment sale flagged sells the units a dollar amount is worth at the pool's value per unit that month, proceeds equal to the amount; asking for more than the pool is worth sells it out for what is there, never overdraws; the gain is the proceeds less the ACB of the units sold (ITA 40(1), 47(1) average cost) · effective 2026-09-21
  7. ↑CRA — adjusted cost base definition (Line 12700) · A non-registered account whose adjusted cost base is left blank on the planner form has its ACB taken as equal to its opening balance — no unrealised gain at the start; every gain the plan reports on that account is growth inside the plan, and any gain accrued before it is left out · effective 2026-09-21
  8. Guide T4037, mutual funds — reinvested distributions ("the amount is added to your ACB") · A reinvested distribution is taxable income by character and is added to the ACB of the units received · See the source · effective 1972-01-01