Policy Journey & What's Changed
- Originally, Budget 2024 proposed increasing the capital gains inclusion rate from 50% to 66⅔% on capital gains over $250,000 for individuals, and all capital gains for corporations/trusts. Effective date was June 25, 2024. (canada.ca)
- On January 31, 2025, this was deferred until January 1, 2026, in order to provide certainty and time for adjustments. (canada.ca)
- On March 21, 2025, the government cancelled the proposed inclusion-rate increase entirely. The inclusion rate will remain at one-half (50%) for 2026, and beyond until any new law is passed. (immigrationnewscanada.ca)
- Simultaneously, the Lifetime Capital Gains Exemption (LCGE) was increased from ~$1,016,836 to $1.25 million, for small business shares, farms, and fishing property, retroactive to dispositions made on or after June 25, 2024. It will also be indexed to inflation beginning in 2026. (immigrationnewscanada.ca)
- The Canadian Entrepreneurs' Incentive originally proposed in Budget 2024 was eliminated, removing the benefit of a reduced inclusion rate (one-third) on gains up to a lifetime maximum for qualifying business owners. (immigrationnewscanada.ca)
Implications for Entrepreneurs and Business Owners
- Sale of a business or eligible property: with inclusion rate staying at 50%, the taxable portion of your sale is lower than if the 66⅔% rate had taken hold. This preserves more after-tax proceeds.
- The higher LCGE means more capital gains can be sheltered under the exemption, reducing tax payable on meaningful exits.
Actionable Planning Tips
- If planning to sell small business shares/farm or fishing property, review your timing. Since LCGE applies retroactively to after June 25, 2024, any eligible dispositions already made may benefit.
- Be cautious about relying on the Entrepreneurs’ Incentive—it has been cancelled. Structuring around that is no longer possible.
- Consult tax advisors early to understand interplay with provincial rules and possibly arrange for multiple exits/dispositions over time to maximize LCGE usage and avoid higher tax exposure.
Example
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Jillian owns qualifying small business corporation shares. She sells eligible shares in December 2025, realizing a $1 million capital gain. Under inclusion rate 50%, she includes $500,000 in income. The LCGE of up to $1.25 million would permit her to exempt up to that amount, possibly avoiding tax on the gain entirely if she has not used up her exemption elsewhere.
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Under the old proposed 66⅔% inclusion rate (if implemented), she would have included $666,667 in income, resulting in significantly higher tax liability for that year.
Caveats & Considerations
- Provinces may have their own rules for capital gains and LCGE; alignment is not guaranteed.
- Be aware that once the inclusion rate change is fully cancelled, there may be pressure in future budgets to revisit it—keep an eye on legislative proposals.
- When calculating net capital gains and losses, ensure reporting aligns with current inclusion rate and not earlier proposal figures.
Bottom line: The reversal of the capital gains inclusion rate increase is a win for investors and entrepreneurs. Use the increased LCGE now, but don’t count on reinstituted higher inclusion without explicit legislation.