Case Studies
Capital Gains Policy Reversal: What Entrepreneurs Must Know Now
After proposals to raise inclusion rate fizzled, the federal government cancelled the increase and raised the Lifetime Capital Gains Exemption to $1.25 million—impacting business exits and sale events.
By NomadicTax Research Team • 5-8 min read • March 25, 2026
## 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](https://www.canada.ca/en/department-finance/news/2024/06/capital-gains-inclusion-rate.html?utm_source=openai))
- On **January 31, 2025**, this was **deferred** until **January 1, 2026**, in order to provide certainty and time for adjustments. ([canada.ca](https://www.canada.ca/en/department-finance/news/2025/01/government-of-canada-announces-deferral-in-implementation-of-change-to-capital-gains-inclusion-rate.html?utm_source=openai))
- 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](https://immigrationnewscanada.ca/new-cra-tax-changes-in-2026/?utm_source=openai))
- 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](https://immigrationnewscanada.ca/new-cra-tax-changes-in-2026/?utm_source=openai))
- 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](https://immigrationnewscanada.ca/new-cra-tax-changes-in-2026/?utm_source=openai))
## 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
- **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.
- 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.