Capital gains tax

How BC law treats it

Canada has no separate capital gains tax. Gains are taxed under the federal Income Tax Act, RSC 1985, c 1 (5th Supp). A capital gain is proceeds of disposition less the adjusted cost base of the property and the costs of disposing of it (s. 40). Under s. 38, a portion of the gain, currently one half, is a taxable capital gain added to income. A proposed increase of the inclusion rate to two thirds was cancelled in 2025. Capital losses can generally be used only against capital gains. BC does not set its own capital gains rate. The taxable capital gain is included in income for BC purposes under the Income Tax Act, RSBC 1996, c 215 and taxed at the owner's BC marginal rate along with federal tax. Corporations pay tax on taxable capital gains at corporate rates, and the untaxed half can usually be paid out tax free to shareholders through the capital dividend account. Individuals selling qualified small business corporation shares may claim the lifetime capital gains exemption under s. 110.6, which shelters a large amount of gain if the corporation and the shares meet holding period and asset tests. A principal residence is generally exempt. Alternative minimum tax can apply to large exempt gains. Structure matters in a sale. Buyers often prefer an asset purchase for a higher tax cost base, while sellers often prefer a share sale to use the exemption. Accountants should confirm current rates and the exemption amount before any transaction.

What it means for your business

For a founder, the difference between a share sale and an asset sale can be worth hundreds of thousands of dollars after tax. Planning for the lifetime capital gains exemption often has to start years before a sale, because the shares must meet holding period and asset tests. Investors, family trusts and holding companies all change how gains are taxed, so the ownership structure should be set with the eventual exit in mind. Example: A Burnaby founder sells the shares of her software company for $2 million. Because the company qualifies as a small business corporation and she has held the shares for over two years, she shelters much of the gain with the lifetime capital gains exemption.

Risks and common mistakes

Describing capital gains tax as a separate BC tax with its own rate. Calculating the gain as sale price less purchase price, ignoring adjusted cost base adjustments and selling costs. Selling assets instead of shares without considering the loss of the lifetime capital gains exemption. Failing to purify a company of passive assets before a sale so the shares qualify for the exemption. Overlooking alternative minimum tax on a large exempt gain.