COVID 19 Update: It is business as usual. We are available to assist you via phone, email or video calls.

What is the difference between capital gains and business income?

Sold real estate, stocks or any other investments? The CRA can classify your profits or losses as either capital or business income. There is a major difference between the two and it can have a large effect on your taxes. With ex-CRAs professionals, Farber Tax Solutions can handle the CRA on your behalf.

Fill out the form to get started or give us call


Solve Your Tax Problem

Book A Free Confidential Consultation


What is the difference between capital gains and business income?


If you have sold real estate, stocks or any other investments, the CRA can classify your profits or losses as either capital or business income. What’s the difference between the two categories, and what effect can it have on your taxes?


Capital Gains:


The taxation of capital gains is considered under section 38 of the Income Tax Act. If you have made a capital gain, only half of that is taxable. Similarly, a capital loss is also calculated at 50%. Moreover, capital losses can only be deducted in your tax returns against other capital gains. They can be deducted from capital gains 3 years back, or for any future capital gains.


Business Income:


If your sale is treated as business income or loss, it is subject to the full extent of regular tax rates. Unlike capital gains, business income is taxed in full at the marginal tax rate. Business losses are fully deductible, even against other forms of income, including employment or office.

To determine which category the transaction belongs to, the CRA will have to prove that the property is either capital property or business inventory. This is primarily based on the original intention behind acquiring the property. If you bought the property for investment purposes and for long-term growth, it is most likely capital property. However, if you bought the property with the intention of selling immediately, or flipping it in the case of real estate, it will likely be considered as inventory.

If you are selling your house, having it categorized as a capital property can be very advantageous. Under paragraph 40(1)(a) of the Income Tax Act, if the property qualifies as a principal residence, the whole gain is exempt from tax. For this reason, the CRA will scrutinize every relevant factor, including:


  • the original purpose of purchasing the home;
  • how long the home was held for;
  • facts regarding the sale of the house; and
  • whether anything may suggest you are in the industry of flipping houses, such as your profession or trade.


Similarly, if you are selling stocks or other investments, but frequently engage in day trading or work in the finance industry, the CRA may categorize the sale profits as business income rather than capital gains.

The CRA can be very tricky to deal with, especially when dealing with technical categorizations like capital versus business income. Our team can help represent you to the CRA and help you win. Please contact us today

Farber Tax Solutions can help you successfully deal with CRA problems. We utilize the experience of our tax experts to:

  • 1| Offer a comprehensive solution that is focused on achieving the most favourable possible outcome for your tax issue;
  • 2| Communicate with the CRA on your behalf and navigate the entire CRA dispute process; and
  • 3| Offer a complete solution to your tax problems, including ex-CRA professionals and tax lawyers from Farber Tax Law.