Entity Setup
Entity Setup & Structuring: Planning for Capital Gains Changes Starting January 2026
Legislative changes coming in 2026 to capital gains rules mean Canadian business owners and investors need to revisit their entity structure and transaction timing.
By NomadicTax Research Team • 5-8 min read • February 17, 2026
## Upcoming Capital Gains Changes: What’s Changing
Starting **January 1, 2026**, the capital gains inclusion rate will increase from **1/2 to 2/3** for individuals realizing over **$250,000/year in gains**, and for **all gains realized by corporations and most trusts**. ([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))
However, important exemptions remain: the **Lifetime Capital Gains Exemption (LCGE)** will stay in force, being increased to **$1.25 million** for eligible gains on small business, farming or fishing property. Indexation of LCGE resumes in 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))
## Entity Structure Considerations
- **Private corporations vs. individual ownership**: For corporate-held assets, all capital gains will be taxed at higher inclusion rates—ownership via individuals may benefit from the thresholds and LCGE.
- **Use of trusts**: Trusts (except certain types) will also have capital gains inclusion at 2/3. Plan early—consider transferring assets before the effective date if aligned with charitable or estate goals.
- **Sale timing**: If expecting a significant capital gain, closing a sale **before Jan 1, 2026** could allow you to take advantage of the 1/2 inclusion rate. Example: selling shares with $300,000 gain—before Jan—gives $150,000 taxed; after Jan, $200,000 taxed.
## Examples
1. **A small business owner with eligible farm property**: If the gain is under LCGE ($1.25 million), they may fully exempt; but beyond that, inclusion rates matter.
2. **An investor expecting large gains from stock sales**: Spread disposition over years, or defer sale until threshold or exemption triggers.
3. **Estate planning**: Using trusts smartly to split ownership, but watch trust-to-trust transfers (see consultation below).
## Related Draft Measures and Consultations
In **late January 2026**, the Department of Finance launched consultations on draft legislation that includes:
- Expanding anti-avoidance rules for **indirect trust-to-trust transfers**, which could affect existing structures. ([canada.ca](https://www.canada.ca/en/department-finance/news/2026/01/government-launches-consultation-on-draft-legislation-for-previously-announced-and-technical-tax-measures.html?utm_source=openai))
- Clarifying what counts as **qualified investments** for registered plans.
- Preventing deferral of corporate income tax through manipulation of year-ends in controlled entities. ([canada.ca](https://www.canada.ca/en/department-finance/news/2026/01/government-launches-consultation-on-draft-legislation-for-previously-announced-and-technical-tax-measures.html?utm_source=openai))
## Action Steps for Entities
- Review any planned sales of assets to see if accelerating transactions before the Jan 1, 2026 cutoff is beneficial.
- Consult with a tax advisor to optimize ownership form (corporation, partnership, trust, or individual) in light of inclusion rate hikes.
- Monitor draft legislation—submit comments by **February 27, 2026** on proposals under consultation. ([canada.ca](https://www.canada.ca/en/department-finance/news/2026/01/government-launches-consultation-on-draft-legislation-for-previously-announced-and-technical-tax-measures.html?utm_source=openai))
- For international investors or foreign affiliates of Canadian companies, ensure you understand income incurment from foreign affiliates and how it’s taxed under income tax rules. ([canada.ca](https://www.canada.ca/en/department-finance/news/2026/01/government-launches-consultation-on-draft-legislation-for-previously-announced-and-technical-tax-measures.html?utm_source=openai))
## Summary
The capital gains tax reforms starting in 2026 will dramatically alter after-tax outcomes for investors, entrepreneurs, and corporations. Early planning around entity structure, timing, and ownership can produce significant savings—or avoid unexpected tax bills. Stay alert, engage in consultations, and strategize wisely.