Capital Gains Tax in Canada and the US: Inclusion Rates, Preferential Rates, and What Changes at the Border

Short version: Capital Gains Inclusion Rate in Canada Explained

Canada and the United States both tax capital gains more lightly than ordinary income, but they do it in different ways. Canada includes half of the gain in income and taxes it at ordinary rates, with no distinction for holding period. The US taxes the full gain at preferential rates if held more than a year and at ordinary rates if not. The two systems produce similar effective rates at the top, diverge sharply on real estate and at death, and create specific problems when a taxpayer straddles the border.

Key takeaways

• Canada: 50% of a capital gain is included in income and taxed at marginal rates; the effective top rate is roughly 24% to 27% depending on province. No short-term/long-term distinction. The principal residence exemption is unlimited. Assets are deemed sold at death.
• US: long-term gains (held more than one year) are taxed at 0%, 15%, or 20% plus the 3.8% net investment income tax; short-term gains at ordinary rates up to 37%. The section 121 home sale exclusion is $250,000 ($500,000 joint). Assets receive a stepped-up basis at death. State tax applies on top in most states.
• At the border: gains are computed in each country's currency, so the same asset can show different gains; the treaty allocates taxing rights and provides a basis step-up for emigrants; and departure from Canada triggers a deemed disposition.

Canada

Half of every capital gain is a taxable capital gain, added to income and taxed at the taxpayer's marginal rate. At Ontario's top combined rate of about 53.5%, the effective rate on the gain is about 26.8%. There is no lower rate for long holding periods and no higher rate for short ones. The 2024 proposal to raise the inclusion rate to two-thirds was cancelled in 2025; the rate remains 50%.

Exemptions: the principal residence exemption shelters the entire gain on a home that was the taxpayer's principal residence for all years owned, with no dollar cap; the lifetime capital gains exemption shelters up to $1.25 million of gain on qualified small business corporation shares and qualified farm or fishing property.

At death, all capital property is deemed sold at fair market value on the final return, and the estate or beneficiaries take the property at that value. Spousal rollovers defer the tax to the surviving spouse's death.

Net capital losses offset capital gains only (except in the year of death and the preceding year), carry back three years, and carry forward indefinitely.

United States

Gains on assets held more than one year are long-term and taxed at 0%, 15%, or 20% depending on taxable income, plus the 3.8% net investment income tax above $200,000 (single) or $250,000 (joint). Gains on assets held one year or less are short-term and taxed as ordinary income. Depreciation recapture on real estate is taxed at up to 25%; collectibles at 28%.

Exclusions: section 121 excludes $250,000 ($500,000 joint) of gain on a home owned and used as a principal residence for two of the last five years; qualified small business stock under section 1202 can be excluded up to limits.

At death, assets receive a basis step-up to fair market value; unrealized gains are never income-taxed, though the estate may owe estate tax above the $15 million exemption.

Net capital losses offset capital gains and up to $3,000 of ordinary income per year, carry forward indefinitely, and do not carry back for individuals.

State tax applies in most states at ordinary rates (California to 13.3%, New York to 10.9%); a handful (Florida, Texas, Nevada, and others) have none, and Washington has a 7% excise on large gains.

Comparison at the top

An Ontario resident and a New York City resident each sell long-held stock with a $200,000 gain. Ontario: $100,000 taxable at 53.5%, about $53,500. New York City: $200,000 at 20% federal plus 3.8% NIIT plus about 14.5% state and city, about $76,600. A Florida resident: $200,000 at 23.8%, about $47,600. Canada's system is more favourable than high-tax US states and less favourable than no-tax ones.

At the border

• Currency. Canada computes gains in Canadian dollars using exchange rates at purchase and sale; the US in US dollars. A US stock bought when the loonie was at par and sold when it was at 72 cents shows a larger Canadian gain than US gain.
• Departure. Leaving Canada triggers a deemed disposition of most capital property at fair market value (departure tax). The treaty's Article XIII(7) lets the emigrant elect to treat the property as sold and reacquired for US purposes at the same value, stepping up US basis so the pre-departure gain is not taxed again.
• Arrival. Arriving in Canada steps up the Canadian cost base to fair market value under section 128.1(1); US basis is unchanged, so a US citizen moving to Canada carries a US gain Canada will never tax and Canada measures only post-arrival growth.
• Real estate. Under Article XIII, gains on real property are taxable where the property is located; the residence country taxes too with a credit. Canadian real estate is excluded from departure tax and remains taxable in Canada on sale (Section 116 clearance for non-residents); US real estate sold by a Canadian is subject to FIRPTA.
• Death. A US citizen dying in Canada faces Canada's deemed disposition income tax and the US estate tax on the same assets; the treaty provides a credit mechanism.

Official sources

"If you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. [...] If you have a net capital gain, a lower tax rate may apply to the gain than the tax rate that applies to your ordinary income." — Internal Revenue Service, Topic No. 409, Capital Gains and Losses, https://www.irs.gov/taxtopics/tc409

"If you sold or disposed of property in 2025 and your taxable capital gains for the year were more than your allowable capital losses, you have to include the difference on line 12700 of your return." — Canada Revenue Agency, Capital gains, https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains.html

Practitioner note

The two systems are close enough at the top that the border decisions, not the rates, drive the tax: which currency, which year, which country's exclusion, and whether the gain is realized before or after a move. A gain realized in Canada at half inclusion the year before moving to California is cheaper than the same gain realized in California at ordinary rates the year after.

See also: Planning a move? See the Canada-to-Florida guide and browse every corridor by city, province, and state.

Next step

Fairlight prepares the cross-border capital gains analysis, the Article XIII(7) election on the first US return, and the U.S. and Canadian returns reporting the gain. See cross-border pricing or book a call.