Capital Gains Tax: Canada vs the US Compared

Canada and the US both tax capital gains, but the mechanics differ enough that the same sale can produce very different results depending on which country taxes it and whether you owe in both. Canada uses an inclusion rate (50% of the gain is included in income and taxed at your marginal rate), while the US uses preferential rates for long-term gains (0%, 15%, or 20%, depending on income, plus the 3.8% net investment income tax for higher earners). The principal residence exemption works differently in each country, the cost base rules differ, and for cross-border individuals the foreign tax credit coordination between the two systems determines whether you pay the higher rate, the lower rate, or something in between.

How does Canada tax capital gains?

Canada does not have a separate capital gains tax rate. Instead, ITA 38 applies an inclusion rate: 50% of the capital gain is included in your income and taxed at your marginal rate. The other 50% is tax-free.

• For an individual in Ontario with $150,000 of other income, a $100,000 capital gain produces $50,000 of taxable income. At a combined federal-provincial marginal rate of roughly 46%, the tax on the gain is approximately $23,000, which is an effective rate of 23% on the full gain. At lower income levels, the effective rate is lower (the 50% inclusion is taxed at a lower marginal rate). At the highest bracket (over $246,752 federally in 2025), the combined rate in Ontario on the included portion is about 53.5%, producing an effective capital gains rate of about 26.8%.

Key Canadian rules:

• No distinction between short-term and long-term. Canada does not have a holding period requirement. A gain realized after one day gets the same 50% inclusion rate as a gain realized after ten years.
• Principal residence exemption. The gain on your principal residence is fully exempt under ITA 40(2)(b), with no dollar cap. One property per family unit per year qualifies. The exemption is claimed on Schedule 3 with Form T2091.
• Lifetime capital gains exemption (LCGE). On the sale of qualified small business corporation shares or qualified farm/fishing property, individuals can claim an exemption of up to $1,275,000 (for 2026, indexed annually) under ITA 110.6.
• Capital losses offset capital gains only (not other income), with unlimited carryforward and a 3-year carryback.

How does the US tax capital gains?

The US distinguishes between short-term and long-term capital gains based on holding period.

Short-term gains (assets held one year or less) are taxed as ordinary income at the taxpayer’s marginal rate (up to 37% federally in 2025).

Long-term gains (assets held more than one year) are taxed at preferential rates under IRC 1(h):

• 0% for taxable income up to $47,025 (single) or $94,050 (married filing jointly) in 2025
• 15% for income between those thresholds and $518,900 (single) or $583,750 (MFJ)
• 20% for income above those thresholds

Additionally, the net investment income tax (NIIT) under IRC 1411 adds 3.8% on net investment income (including capital gains) for individuals with modified AGI above $200,000 (single) or $250,000 (MFJ). The NIIT is not offset by foreign tax credits under the current IRS position, which creates a potential layer of double taxation for cross-border individuals.

Key US rules:

• Section 121 exclusion. The gain on the sale of a principal residence is excluded up to $250,000 ($500,000 for married filing jointly) if you owned and used the home as your principal residence for at least 2 of the 5 years before the sale. Unlike the Canadian exemption, this has a dollar cap.
• Step-up in basis at death. Under IRC 1014, the cost basis of inherited assets is stepped up to fair market value at the date of death, eliminating the built-in gain. Canada does not have this (Canada deems a disposition at death under ITA 70(5)).
• Capital losses offset capital gains plus up to $3,000 of ordinary income per year, with unlimited carryforward (no carryback for individuals).

Which country has the lower rate?

It depends on the amount of the gain, your other income, and which country is your residence.

• For long-term gains at moderate income levels, the US rate is lower. A US taxpayer in the 15% bracket pays an effective rate of 15% (plus potentially 3.8% NIIT), while a Canadian in Ontario at a similar income level pays an effective rate of roughly 20-25% (50% inclusion at a 40-50% marginal rate).

For short-term gains, Canada is often lower. The US taxes short-term gains at ordinary rates (up to 37%), while Canada’s 50% inclusion means the effective rate on any gain, regardless of holding period, tops out at roughly 27% (53.5% marginal rate x 50%).

For very high earners, the US rate on long-term gains (20% + 3.8% NIIT = 23.8%) is close to the Canadian effective rate (roughly 26-27% in Ontario). The difference narrows as income rises.

How does the principal residence exemption compare?

The Canadian principal residence exemption is more generous in dollar terms: there is no cap on the amount of gain that can be excluded, and the exemption applies for every year the property was designated as the principal residence. A $2 million gain on a home is fully exempt in Canada if the home was the principal residence for the entire period of ownership.

• The US Section 121 exclusion caps at $250,000 ($500,000 MFJ). A $2 million gain produces taxable gain of $1.5 million ($1.75 million for a single filer). The exclusion also requires ownership and use for 2 of the 5 years before the sale, while the Canadian exemption has no minimum use period (though the “ordinarily inhabited” requirement in ITA 54 requires actual habitation).

For cross-border individuals who sell a home that qualifies in both countries, the interaction is complex. Canada allows the exemption for years the home was designated as the principal residence. The US allows the Section 121 exclusion if the ownership and use tests are met. If the gain exceeds the US $250K/$500K cap, the excess is taxable in the US, and the Canadian exemption does not help on the US return.

What happens when both countries tax the same gain?

For a US citizen living in Canada, both countries tax the same capital gain. The treaty and the foreign tax credit mechanism prevent double taxation, but the mechanics matter.

• On the Canadian return, the gain is included at 50% and taxed at the marginal rate. On the US return, the gain is reported in full and taxed at the applicable long-term rate (or short-term if held one year or less).

The Form 1116 foreign tax credit on the US return credits Canadian tax paid against US tax on the same income. But the credit is calculated on a per-category basis, and capital gains may fall into different FTC categories than employment income. Excess credits in one category do not automatically offset tax in another, which can create a residual US tax even when Canadian rates are higher overall.

The departure tax creates an additional complication when leaving Canada: Canada deems a disposition of all capital property on the departure date, while the US does not recognize a corresponding sale. The US allows a basis step-up via the treaty election under Article XIII(7), but the election must be affirmatively made.

What should I do next?

If you are a cross-border individual with capital gains in either country, the tax depends on your residence, the type of asset, the holding period (for US purposes), and whether the gain triggers reporting obligations (Form 8938, FBAR) in addition to the income tax.

• Canada vs US tax rates overall
• Form 1116 and the foreign tax credit
• Canada departure tax
• Basis step-up via treaty election
• PFIC-safe investments for US citizens in Canada
• Tax-loss harvesting across the border

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.