Entity Setup
Entity Setup: Choosing the Right Structure in Light of Changes to Capital Gains Rules
With government-proposed changes to capital gains inclusion rates coming January 1, 2026, entrepreneurs and trusts need to reassess entity structures to balance growth, risk, and tax exposure.
By NomadicTax Research Team • 5-8 min read • November 23, 2025
## Upcoming Changes to Capital Gains Inclusion Rate
Canada’s government has proposed increasing the **inclusion rate on capital gains** from **50% to 66⅔%** for capital gains realized in excess of **$250,000 annually by individuals**, and for **all capital gains of corporations and most trusts**, effective **January 1, 2026**.([canada.ca](https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2025/update-cra-administration-proposed-capital-gains-taxation-changes.html?utm_source=openai)) This change may significantly increase personal tax liabilities for those realizing large gains.
Also, changes to **Lifetime Capital Gains Exemption (LCGE)** remain, including a proposed increase to **$1.25 million** for eligible small business shares, farming, and fishing property—effective for dispositions on or after **June 25, 2024**.([canada.ca](https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2025/update-cra-administration-proposed-capital-gains-taxation-changes.html?utm_source=openai))
## Implications for Establishing or Reorganizing Entities
Here are key considerations when deciding whether to operate through a corporation, trust, or as an individual with side businesses.
### Corporations vs Trusts vs Individuals
* **Individuals**: Higher inclusion rates after Jan 1, 2026 will mean **capital gains** over $250,000 taxable at 66.67%. Smaller gains less impacted. LCGE still applicable for eligible gains through June 25, 2024 onward.([canada.ca](https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2025/update-cra-administration-proposed-capital-gains-taxation-changes.html?utm_source=openai))
* **Corporations**: All gains, regardless of size or threshold, get the increased rate. Effective to strategize gains realization, possibly selling assets before applying new rules.
* **Trusts**: Most trusts also face the higher inclusion rate. But trusts can access deductions and distribute gains; structuring properly can reduce who legally realizes the gain.
### Strategies to Consider
1. **Pre-2026 asset dispositions**: If you plan to sell eligible assets or shares, doing so before **January 1, 2026** may lock in the old 50% inclusion rate for gains under thresholds.
2. **Use of Lifetime Capital Gains Exemption**: For qualifying small-business shares or farming/fishing property, LCGE is still $1.25 million for dispositions after **June 25, 2024**. Ensure that any entity or shareholder can claim it.([canada.ca](https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2025/update-cra-administration-proposed-capital-gains-taxation-changes.html?utm_source=openai))
3. **Tiered structures and holding companies**: Using corporate or trust holding vehicles may allow flexibility in attributing gains across individuals with lower marginal tax exposure or those eligible for LCGE.
4. **Timing of trust distributions**: If trusts are involved, consider distributing gains to beneficiaries who may be taxed at lower marginal rates or who have unused exemptions.
5. **Transactional planning with estate and gift planning**: Gifting while alive or structuring estates may help allocate inclusion of gains and reduce exposure under the new higher rates.
### Example Scenario
David owns a small tech company held in a corporation. He expects to sell shares raising a gain of **$500,000** in 2026.
* Under current rules: corporation’s capital gain inclusion rate will be 66.67%—so $333,333 of gain is included in taxable income.
* If structure is set up before Jan 1, 2026, and if business qualifies, David may release share sale via LCGE if eligible.
* Alternatively, transferring shares to a trust or to individuals with unused LCGE or lower marginal tax rates may reduce the tax burden.
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## Considerations Before Making Structural Changes
* Re-structuring costs: legal, accounting, and administrative costs associated with changing entity types.
* Eligibility: LCGE has stringent eligibility requirements.
* Reporting complexity: using trusts or holding companies increases compliance burdens.
* Future policy risk: proposed changes may evolve; always watch updates after consultations.
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## Conclusion
The impending increase in capital gains inclusion rates starting January 2026 means entity setup and gains realization strategies must be adjusted. Individuals, corporations, and trusts alike should analyze specific situations, act before effective dates where feasible, and consider structuring gains and asset ownership to reduce tax exposure. Consulting tax professionals is crucial.