Capital gains in Canada are taxed at what inclusion rate, and what is the effect on investment choices?

• A. 100% inclusion
• B. 50% inclusion
• C. 0% inclusion
• D. 25% inclusion

Answer: (B)

Capital gains in Canada are taxed at a 50% inclusion rate for individuals. This means only half of a realized capital gain is added to your taxable income and taxed at your marginal rate, while the other half is not taxed at that time. This makes capital gains more tax-efficient than ordinary income like interest, which is taxed in full.

Because only half the gain is taxed, investors often prefer assets with potential for long-term appreciation and may hold them longer to defer taxes. Tax planning tools such as harvesting capital losses to offset gains can also be leveraged. Within tax-advantaged accounts, gains are treated even more favorably (TFSA) or tax-deferred (RRSP) until funds are withdrawn. If the inclusion rate were 100%, gains would be taxed fully; if it were 0%, gains would be untaxed; a 25% rate would be less favorable than 50%.