Understanding the Recent Federal Tax Shifts for Digital Nomads
If you're a Canadian living outside the country or someone earning Canadian-source income while abroad, several policy changes set to take effect in 2026 may have a direct impact on your tax obligations. Below are key areas to watch and plan around.
1. Capital Gains Inclusion Rate Remains at 50% Through 2025
- A proposed change to increase the inclusion rate—from one-half to two-thirds—on certain capital gains was deferred from June 25, 2024, to January 1, 2026. Therefore, for the 2025 taxation year, the 50% inclusion rate will still apply. (canada.ca)
- This applies both to individuals and to companies, including trusts. (canada.ca)
2. Lifetime Capital Gains Exemption (LCGE) Increase and Indexation
- The LCGE has been raised to $1.25 million, effective June 25, 2024, up from the previous threshold of about $1,016,836. (canada.ca)
- Starting in 2026, this exemption will be indexed for inflation. This matters if you're selling certain eligible small business shares, or farm or fishing property. (canada.ca)
3. Lowest Federal Personal Tax Rate Lowered to 14% in 2026
- As part of broader tax relief measures from Budget 2025, the lowest federal personal income tax rate will drop from 15% to 14% starting July 1, 2025, which then becomes the full-year rate for tax 2026 and onwards. (canada.ca)
- This also affects the rate applied to most non-refundable tax credits, which typically mirror the lowest marginal tax rate. (canada.ca)
Applying These Changes: Practical Tips for Digital Nomads
| Scenario | What Changes | What You Should Do |
|---|---|---|
| Canadian resident earning passive investment income abroad | Inclusion rate stays at 50% through 2025; LCGE higher threshold helps reduce tax on gains | Track the date when gains were realized; structure sales to take advantage of 2025 lower inclusion rate if possible |
| Foreign workers getting paid by Canadian entities | Low income tax rate reduction may affect withholding if they become residents or earn enough taxable income | Determine residency status carefully; consult with employer and a cross-border tax expert for withholding adjustments |
| Selling eligible business shares or property | LCGE increase gives more room for exemptions; upcoming inflation indexation may increase limit in future | Review your eligible assets; timing exits and dispositions could lead to tax savings |
Strategic Moves Before 2026
- If planning a disposition leading to capital gains, aim to complete it before January 1, 2026 if it would allow you to benefit from the 50% inclusion rate.
- If you're earning in Canada but residing abroad, double-check the Canada Revenue Agency (CRA) rules for non-resident taxation—especially how treaty provisions apply.
- For business owners abroad: commit to documentation showing eligible small business shares, to secure the LCGE.
Bottom line: These changes—rate cuts, exemption increases, and delayed proposals—all offer opportunities. To maximize benefits, get your timing right, know your eligibility, and consult a cross-border tax specialist if you have variables like multiple jurisdictions, treaties, or foreign income streams.