The capital gain is the most discussed tax in investing — and one of the most misunderstood. Three mechanisms govern it: realization, partial inclusion and loss carryovers. None of the three needs a number to be understood.
Realization — nothing until you sell
A capital gain exists for tax purposes only at the moment of disposition — in practice, the sale. A position that has doubled in value triggers, as a general rule, no tax while it is held: the gain is "unrealized", and the tax authority is normally not yet interested in it. That is the same distinction the app makes everywhere between unrealized and realized gain — the tax boundary runs exactly there.
Two nuances of honesty: some events are treated as a sale without being one (a deemed disposition — for example certain transfers between account types); and all of this concerns the non-registered account — in a TFSA or an RRSP, a realized gain is not taxed on sale (see the article on accounts).
Partial inclusion — the principle, without its rate
A realized capital gain does not enter taxable income in full: only a fraction of it is included. That fraction — the inclusion rate — is a parameter set by law, which has changed through history and can change again: precisely the kind of figure a general article must not freeze. The principle itself is stable: at equal income, a dollar of capital gain is as a general rule taxed less than a dollar of interest, because only part of it is taxable.
Losses — carried back and forward
A realized capital loss is normally deductible only against capital gains — not against a salary. But it travels through time:
- backward: it can, in principle, be applied to the gains of the few preceding years (the law sets the window), giving rise to a refund of tax already paid;
- forward: it carries over indefinitely, waiting for future gains to offset.
A realized loss is therefore never "lost" for tax purposes — it waits. With one important exception: the superficial loss, which has its own article.
A neutral worked example
Without an inclusion rate (a parameter of law), the mechanics still show:
- Purchase at $10,000, sale at $14,000: realized gain of $4,000. A fraction of those $4,000 — the one the law sets — is added to taxable income.
- The same year, another sale realizes a $1,500 loss: it is deducted from the gain — the net gain becomes $2,500, and it is on that amount that inclusion applies.
- Had the loss been $5,000, the $1,000 excess would have offset nothing that year — it would go backward or forward.
What this changes for your tracking
Everyfolio's report strictly separates realized from unrealized — that is the raw material of any capital gains calculation, but not the calculation itself: the tax ACB (across all accounts), deemed dispositions and inclusion rules belong to the return, backed by the slips.
Official sources
The inclusion rate, the carry-back window and disposition rules are set by the Canada Revenue Agency; these parameters change. Quebec residents also report the same disposition to Revenu Québec, under its own rules. Consult their guides on capital gains and losses.
- Canada Revenue Agency — line 12700, capital gains (and losses): 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
- Canada Revenue Agency — guide T4037, Capital Gains: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4037.html
- Revenu Québec — citizens: https://www.revenuquebec.ca/en/citizens/
Informative, general content — not personalized advice. For your situation: your institution or an advisor.