A History of Capital Gains Taxation in Canada
From zero tax to 75% inclusion and back. Trace the full history of capital gains taxation in Canada from 1972 to today.
Canada didn’t always tax capital gains. For most of the country’s history, profits from selling investments were entirely tax-free. The introduction of capital gains tax in 1972, and the multiple changes to the inclusion rate since then, tell an interesting story about Canadian tax policy, economic priorities, and political debate.
This history won’t change how you calculate your Adjusted Cost Base today, but understanding where we’ve been provides useful context for where capital gains policy might go next.
Before 1972: No Capital Gains Tax
For over a century after Confederation, Canada did not tax capital gains at all. Profits from selling stocks, real estate (other than business inventory), and other capital property simply weren’t considered taxable income.
That changed after the Royal Commission on Taxation, commonly known as the Carter Commission, which was established in 1962 and reported in 1966. The commission’s most famous principle was that “a buck is a buck is a buck”, meaning all forms of income should be taxed equally, regardless of source.
The Carter Commission recommended that capital gains be fully included in taxable income, just like employment or interest income. The government did not go that far.
1972: Capital Gains Tax Is Born
On January 1, 1972, Canada introduced its first capital gains tax as part of a sweeping reform of the Income Tax Act. Rather than adopting the Carter Commission’s recommendation of full inclusion, the government chose a compromise:
50% of capital gains would be included in taxable income.
So if you realized a $1,000 capital gain, only $500 was added to your income. The other half was effectively tax-free.
The 50% rate reflected a balance between the principle of tax fairness and concerns about:
- Discouraging investment and risk-taking
- Reducing capital formation
- Making Canada less competitive for investors
To accompany this change, the government also established the concept of Valuation Day (V-Day), December 22, 1971, as the date from which capital property was deemed to have been acquired for tax purposes. Assets owned before this date would only be taxed on gains accruing after V-Day.
1985: The Lifetime Capital Gains Exemption
In May 1985, the federal government introduced the Lifetime Capital Gains Exemption (LCGE), initially set at $500,000. This allowed individuals to shelter a significant amount of capital gains from tax entirely.
The general exemption was reduced to $100,000 in 1987 and eventually eliminated entirely in 1994 for most types of property. It survived only for:
- Qualified small business corporation shares
- Qualified farm and fishing property
The LCGE for these qualifying properties has been indexed over time and currently stands at $1,250,000 (increased from $1,000,000 in Budget 2024).
1988-1990: The Inclusion Rate Climbs
In the late 1980s, as part of broader tax reform under Finance Minister Michael Wilson, the inclusion rate began to climb:
| Year | Inclusion Rate | Change |
|---|---|---|
| 1972–1987 | 50% (one-half) | Original rate |
| 1988 | 66.67% (two-thirds) | Increased |
| 1990 | 75% (three-quarters) | Increased again |
The increase to 75% in 1990 coincided with a period of serious fiscal pressure in Canada. The government was running significant deficits, and increasing the inclusion rate was one of several revenue measures adopted during this time.
At 75%, three-quarters of every capital gain was taxable. That remains the highest the inclusion rate has ever been in Canada.
2000: Back Down to 50%
The inclusion rate didn’t stay at 75% for long. In the February 2000 federal budget, the government reduced it to 66.67% (two-thirds), and later that same year it was further reduced back to 50% (one-half).
Several factors drove the reductions:
- International competitiveness: The United States had reduced its capital gains tax rate, and there was pressure to keep Canadian rates competitive
- Economic growth: Lower capital gains taxes were seen as encouraging investment and entrepreneurship
- The Senate Banking Committee’s 2000 report recommended significant reductions, noting that high capital gains taxes discouraged risk-taking and capital formation
The 50% rate has remained in place ever since, surviving multiple governments of different political stripes.
2024-2025: The Proposed Increase That Wasn’t
In Budget 2024, the Trudeau Liberal government proposed increasing the capital gains inclusion rate effective June 25, 2024:
- For corporations and trusts: increase to 66.67% (two-thirds) on all capital gains
- For individuals: the first $250,000 in annual capital gains would remain at 50%, with gains above that threshold taxed at the 66.67% rate
The announcement generated significant debate. Supporters argued it would increase tax fairness, as capital gains disproportionately benefit higher-income Canadians. Critics warned it would discourage investment, harm small business owners, and drive capital out of Canada.
The legislation was never passed, though. Parliament was prorogued, and on January 31, 2025, the government deferred the effective date to January 1, 2026.
Carney in his liberal leadership speech effectively declared he would reverse one of Trudeau’s signature fiscal policies with Trudeau in the front row nodding along.
As promised, on March 21, 2025, newly sworn-in Prime Minister Mark Carney announced the cancellation of the proposed increase entirely. The inclusion rate would remain at 50% for all taxpayers.
Timeline Summary
| Year | Inclusion Rate | Notable Event |
|---|---|---|
| Before 1972 | 0% | No capital gains tax in Canada |
| 1972 | 50% | Capital gains tax introduced |
| 1985 | 50% | $500,000 lifetime exemption introduced |
| 1988 | 66.67% | Inclusion rate increased |
| 1990 | 75% | Inclusion rate increased again |
| 1994 | 75% | General lifetime exemption eliminated |
| 2000 | 66.67% | Inclusion rate reduced |
| 2000 | 50% | Inclusion rate reduced further |
| 2024 | 50% | Increase to 66.67% proposed but never enacted |
| 2025 | 50% | Proposed increase formally cancelled |
What This Means for Investors Today
The current 50% inclusion rate has been stable for over 25 years, the longest period without change since capital gains tax was introduced. But as this history shows, the rate has moved both up and down depending on economic conditions and political priorities.
For investors, the practical takeaway is simple: track your ACB accurately regardless of the inclusion rate. The rate determines how much of your gain is taxable, but your ACB determines how large the gain is in the first place. Getting your ACB wrong is a problem no matter what the inclusion rate happens to be.
As portfolios grow more complex, with distributions, reinvestments, corporate actions, and foreign holdings, keeping accurate records becomes increasingly important.
Frequently Asked Questions
Has the capital gains inclusion rate ever been 100% in Canada?
No. Despite the Carter Commission’s recommendation for full inclusion, the rate has never exceeded 75%, which was in effect from 1990 to February 2000.
Why didn’t the 2024 proposed increase pass?
The legislation was introduced but Parliament was prorogued before it could be enacted. Prorogation effectively “kills” any non-enacted legislation. In January 2025, the effective date was deferred, and in March 2025, Mark Carney cancelled the proposal entirely.
Could the inclusion rate change again in the future?
It is always possible. The rate has changed multiple times since 1972, and future governments could propose increases or decreases. This is one reason why maintaining accurate investment records is important regardless of the current rate.
Does the inclusion rate affect capital losses too?
Yes. The same inclusion rate applies to capital losses. At a 50% inclusion rate, only 50% of your capital loss (called an “allowable capital loss”) can be used to offset taxable capital gains.
What was Valuation Day?
Valuation Day is December 31, 1971, the day before capital gains tax took effect. For assets owned before 1972, V-Day values establish the starting cost base, so only gains accruing after that date are taxable. See CRA T2076
This article is for informational purposes only and does not constitute tax, legal, or financial advice. Tax rules can change and individual circumstances vary. Consult a qualified tax professional for advice specific to your situation.
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