What’s Changing & When
Canada has proposed an increase in the capital gains inclusion rate from one-half to two-thirds, for individuals realizing more than $250,000 annually in capital gains and for all gains by corporations and most trusts. These changes are scheduled to take effect January 1, 2026, remaining subject to legislation. (canada.ca)
The Lifetime Capital Gains Exemption (LCGE) is being increased to $1.25 million for eligible capital gains on small business shares and farming/fishing property, effective June 25, 2024. Indexation will resume in 2026. (canada.ca)
Additionally, a new Canadian Entrepreneurs’ Incentive will allow a one-third inclusion rate on up to $2 million of eligible capital gains lifetime, phasing in until 2029. (canada.ca)
Implications for Different Types of Investors
| Investor Type | Key Effects | Strategic Considerations |
|---|---|---|
| Small business owners | Can benefit from higher LCGE and entrepreneurs’ incentive. Gains on eligible small business shares may be taxed less under new incentive if within threshold. | |
| High-net-worth individuals | Gains over $250,000 will see more taxed under inclusion rate increasing to 66.7%. Consider realizing gains before 2026 if advantageous. | |
| Trusts & Corporations | All gains caught under higher inclusion rate, but planning via timing or deferral could help. |
Strategy Suggestions Before 2026
- Evaluate whether to crystallize gains early—selling assets before January 1, 2026 may allow use of one-half inclusion rate.
- Use the LCGE carefully—if your small business share gains qualify, plan sales around LCGE limit.
- Consider using the Entrepreneurs’ Incentive—if you expect lifetime eligible gains within threshold, match gains to access lower inclusion rate.
- Defer non-essential dispositions—if gains are modest or you can wait, defer until after LCGE increase and incentive fully operational.
- Review structure for trusts and corporations—if considering reorganizations or distributions, their capital gains exposures will change.
Risks and Caveats
- These are proposed rules, not yet enacted. Legislative approval, form changes, and CRA guidance are still pending.
- Transition rules, especially for gains straddling the effective date, will matter—and documentation is essential.
- Provinces may have their own tax rules or add additional levies that interact with federal inclusion rate changes.
- Tax software and filing forms may lag implementation—ensure you're using latest CRA guidance.
Example Comparison
Suppose “Ana” has $400,000 in capital gains in 2026:
- Under current one-half inclusion rate, $200,000 is taxable income.
- Under proposed two-thirds rate, $266,667 becomes taxable—a difference of $66,667 more taxable income.
- If eligible small business shares and within Entrepreneurs’ Incentive lifetime limit, some portion might get only a one-third inclusion rate, significantly reducing tax liability.
The upcoming changes to capital gains taxation will reshape opportunities and risks for investors. By timing transactions, leveraging incentives like LCGE and the Entrepreneurs’ Incentive, and staying informed through CRA releases, investors can make smarter, tax-efficient decisions in the years ahead.