Capital gain taxes can have a dramatic impact on your wealth. In both Canada and the United States, 2025 brings important changes that investors and businesses can’t afford to ignore.
While both countries tax capital gains, the rules, exemptions, and tax planning opportunities differ significantly. Misunderstanding these differences could cost you thousands.
Here are 7 shocking Canada vs US capital gains tax differences you must know.
Capital Gain Taxes: Inclusion Rate vs. Tiered Tax Rates
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Canada: Only a portion of the gain is taxed. Currently, 50% of gains are taxable, but the 2025 federal budget proposes increasing this to 66.7% for high-income earners, corporations, and trusts.
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US: No inclusion rate — instead, gains are taxed as either short-term (ordinary income rates up to 37%) or long-term (preferential rates of 0–20%).
📌 Shock Factor: Canada taxes half or more of every gain, while the US rewards long-term investing with lower rates.
The Home Advantage – Principal Residence Rules
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Canada: Full exemption on capital gains from selling your principal residence.
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US: Limited exemption — up to $250,000 for individuals or $500,000 for married couples.
📌 Shock Factor: In the US, selling a home may leave you with taxable gains, but in Canada, your primary home is fully exempt.
Small Business Exemptions and Capital Gain Taxes
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Canada: Offers a Lifetime Capital Gains Exemption (LCGE) on qualified small business corporation shares and certain farm/fishing properties.
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US: No broad equivalent, though certain Qualified Small Business Stock (QSBS) rules exist with limited application.
📌 Shock Factor: Canadian entrepreneurs can shield millions in lifetime business gains — a benefit many US business owners don’t enjoy.
State vs. Provincial Tax Impact
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Canada: Capital gains are taxed federally and at the provincial level, with rates varying by province.
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US: Federal rates apply, but states have different rules. Some, like California and New York, heavily tax gains, while Florida and Texas impose no state income tax at all.
📌 Shock Factor: A cross-border move can swing your tax bill by double digits, depending on the province or state.
Retirement Accounts and Deferring Capital Gain Taxes
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Canada: Tools like RRSPs and TFSAs allow tax deferral or tax-free growth, but gains outside these accounts are taxable.
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US: IRAs and 401(k)s provide deferral, while Roth accounts offer tax-free growth if conditions are met.
📌 Shock Factor: Both countries offer tax shelters, but contribution rules differ — failing to maximize them can mean thousands lost to taxes.
Cross-Border Double Taxation Risks on Capital Gains
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Canada–US Tax Treaty: Prevents double taxation, but complex rules apply.
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Example: A Canadian selling US real estate faces IRS withholding plus Canadian reporting. Americans with Canadian investments face dual reporting too.
📌 Shock Factor: Without treaty planning, you may be taxed twice on the same gain — once in the US, once in Canada.
2025 Proposed Changes to Capital Gain Taxes
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Canada: Proposal to raise the inclusion rate to 66.7% for wealthier taxpayers.
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US: Ongoing discussions to raise long-term capital gains rates for high-income earners.
📌 Shock Factor: Both governments are tightening rules — wealthy taxpayers could face much higher bills if they don’t plan ahead.
Conclusion
These 7 shocking differences between Canada and US capital gain taxes highlight why cross-border tax planning is essential. What looks like a smart move in one country may cost you dearly in another.
👉 At Finovate, we specialize in bookkeeping, payroll, and tax compliance across Canada, the US, the UK and Dubai. Whether you’re an investor, entrepreneur, or growing business, our experts can help you navigate these rules and avoid costly mistakes.
📩 Contact us today to protect your wealth and plan smarter for 2025 and beyond.
