Overview of Upcoming Capital Gains Changes
- Inclusion rate increase: Effective January 1, 2026, the inclusion rate for capital gains for individuals on gains over $250,000 annually and all gains for corporations and most trusts will rise from 50% to 66.67%.(canada.ca)
- Lifetime Capital Gains Exemption (LCGE) increased to $1.25 million, for eligible capital gains (small business shares, farming, fishing property), effective June 25, 2024.(canada.ca)
- Canadian Entrepreneurs’ Incentive: a reduced inclusion rate (33.3%) for founding entrepreneurs up to a lifetime maximum of $2 million, phasing up to full implementation by 2034.(canada.ca)
What Taxpayers Need to Do Now
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Track your dispositions: Keep detailed records of capital gains realized in 2025 and anticipate those in early 2026. Timing asset sales around that cutoff could meaningfully impact tax.
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Consider splitting gains: Spousal or partner strategies may help distribute gains below thresholds to avoid or limit higher inclusion rates.
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Review trust structures: Since trusts and corporations face stricter inclusion, ensure trust deeds and corporate arrangements are reviewed to understand tax exposure from capital gains.
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Plan business exits carefully: Entrepreneurs and small business owners who plan to sell shares or businesses should know how LCGE and the entrepreneur incentive can reduce taxable inclusion.
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Ensure software and forms updated: CRA warnings indicate forms for capital gains will revert to current inclusion rate until change comes into force. Make sure your tax software uses latest rules.(canada.ca)
Examples
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Investor A sells appreciated property in summer 2025, realizes $200,000 in capital gains: inclusion rate remains at 50% since sale is before Jan 1, 2026. If sold Jan 2026, inclusion would be 66.67% unless the LCGE or other exemptions apply.
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Entrepreneur B sells qualifying small business shares for $1.5 million in 2026: they may apply the LCGE ($1.25M) and still use the Entrepreneurs’ Incentive on the remaining eligible portion to reduce inclusion rate. The combination could lower effective inclusion for much of the gain.
Pitfalls to Avoid
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Ignoring thresholds: the $250,000 annual threshold for individuals is critical. Exceeding it triggers the higher inclusion rate immediately.
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Failing to plan ahead for exemptions: The LCGE increase and entrepreneurs’ incentive are powerful, but must be used properly. Exceeding lifetime limits results in standard inclusion rates for excess gains.
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Misclassifying asset types: Small business shares, farming/fishing property have special treatment; assets not qualifying for bonus treatments may be taxed under regular rules.
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Late-filing and trust reporting: Trust and corporation gains require correct reporting. Penalties, interest, or reassessment could result from errors.
Key Takeaways
- Sticky date: January 1, 2026 is when inclusion rate changes fully apply. 2025 taxed under earlier rate for capital gains dispositions before then.
- Use exemptions and incentives available now to mitigate future tax exposure.
- Good record-keeping is essential, especially for entrepreneurs and trustees.
- Ensure you show up ready when tax season arrives with software, forms, and structures aligned with the new rules.