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Capital gains and the adjusted cost base

A capital gain is the amount by which what an investment sells for exceeds what it cost. In a non-registered account the gain is taxed when the investment is sold, not while it grows. Inside a TFSA a gain is never taxed, and inside an RRSP it is taxed only as the money is withdrawn, as ordinary income.

The rules

  • Half of a gain is taxable. The inclusion rate for individuals is 50%. The proposed increase to two thirds above $250,000 was cancelled in March 2025.
  • The taxable half is added to other income and taxed at the person's own marginal rate, so the tax on a gain depends on the brackets it lands in.
  • The adjusted cost base (ACB) is what the investment cost: the purchase price plus commissions and other costs of buying it.
  • Identical investments are averaged. Shares or fund units of the same kind, held across all of a person's non-registered accounts, form one pool with one average cost per unit. A sale uses the average, not the price of a particular purchase.
  • The gain is proceeds of the sale, less the ACB of the units sold, less the costs of selling (commissions, legal fees).
  • A reinvested distribution adds to the ACB of the units it buys. A return of capital from a fund or trust lowers it. The ACB cannot go below nil: any shortfall is treated as a gain in that year and the ACB resets to nil.

The formula

gain = proceeds − selling costs − (ACB × units sold ÷ units held)
taxable amount = gain × 50%

What the engine does

  • Keeps one pool per person for a non-registered account, with a unit count and an ACB. A contribution buys units at the current value; a withdrawal sells the units that amount is worth, at average cost.
  • Takes the account's annual return as growth in the price of the units. Nothing is taxed until a sale, so the gain is realised in the month units are sold, and the tax on it settles with the return the following April.
  • Applies the 50% inclusion to the person's own bracket. A loss is handled as described in capital losses.
  • Treats an ACB left blank as equal to the opening balance. That assumes no gain had accrued before the plan began, so tax on any earlier growth is left out, and the plan says so.
  • Applies a separate gain rule to a home that is sold; see the principal residence exemption and selling a home.

What it deliberately does not

  • It does not tax unsold growth at the end of the plan, so net worth shows investments at full value with no tax set aside for a future sale.
  • It does not read T5008 slips or track purchases lot by lot. One pool, one average cost.
  • It does not model currency conversion on foreign holdings or corporate actions such as splits and mergers.

Connected to

  • Auto-allocation · When switched on, money left after spending and your own contributions is placed for you down a priority list — FHSA, then RRSP, then TFSA, then non-registered by default — each account taking what its room allows. Every dollar it moves is shown, by account, on each month and year.
  • Capital losses and the superficial-loss rule · A loss on a non-registered investment first cancels capital gains in the same year; any excess carries back three years or forward without limit. A loss is denied if the same investment is bought back within 30 days.
  • Expected returns and fees · The default return is 6.35% a year, nominal and net of fees, for an 80/20 stock and bond portfolio. It is an expected long-run average, not a forecast, and an account's own rate replaces it.
  • Income tax brackets and your marginal rate · Federal and Ontario tax are each charged in slices of income at rising rates, then reduced by credits, with an Ontario surtax and health premium on top. The marginal rate is what the next dollar costs; the average rate is total tax over income.
  • Net worth, as the plan counts it · Net worth is everything the plan holds (cash, investment and registered accounts, homes at market value) minus mortgages, credit lines, debts and tax owing. It is not reduced for selling costs or for tax on money still in an RRSP.
  • Renting out part of your home · Suite income is taxable and its expenses are deductible on the rented portion, but renting can also limit the principal-residence exemption on the eventual sale. The planner assumes the rental use stays ancillary, so the whole gain on a sale stays exempt, and says it assumed so.
  • Selling a home · A sale turns the home's projected market value into cash after selling costs of 5.8% and the mortgage payout. The gain on a principal residence is exempt from tax, apart from the part that was rented out when the exemption does not cover it.
  • TFSA contribution room · Room starts accruing the year you turn 18, not the year you open an account, and it never expires. Withdrawals come back the following January. Limits past 2026 have not been announced, so the plan projects them by the rule the Act sets and says so.
  • The alternative minimum tax · A parallel tax calculation that applies a flat rate to a wider measure of income, so someone with a large capital gain cannot owe almost nothing. The higher of the regular and minimum tax is paid, and any extra is carried forward as credit.

Sources