What’s the Current Capital Gains Landscape?
- Originally, Budget 2024 proposed raising the capital gains inclusion rate from ½ to ⅔ for corporations/trusts and for individual gains over $250,000/year. Effective date proposed as June 25, 2024. (canada.ca)
- However, in January 2025, the government deferred implementing the higher inclusion rate for individuals and corporations, pushing it back to January 1, 2026. Until then, all capital gains realized remain subject to the ½ inclusion rate, except above-threshold amounts once the measure takes effect. (canada.ca)
- Additionally, the Lifetime Capital Gains Exemption (LCGE) was increased to $1.25 million for qualifying property as of June 25, 2024, and indexation is to resume in 2026. (canada.ca)
What Do These Changes Mean in Practice?
- Lower inclusion rate (½) for gains realized in 2025 gives fewer taxable gains now than under the proposed ⅔ rate.
- Gains above $250,000/year will be more impacted once ⅔ rate kicks in. Individuals should plan dispositions accordingly.
- LCGE limit higher means more gains may qualify for exemption—especially for small business shares or farm/fishing property.
Tax Planning Strategies Before the Change
- Accelerate Dispositions into 2025: If considering selling business shares, real estate, or other capital property, doing so before January 1, 2026 means inclusion at ½. If after, gains above $250,000 taxed more heavily.
- Combine Gains and Losses: Harvest losses in 2025 to offset gains. Net capital losses from other years can be carried forward.
- Use the Lifetime Capital Gains Exemption (LCGE): Qualifying gains of up to $1.25 M (for the property types allowed) may be exempt—move toward qualifying property or structuring for eligibility.
Example Scenario
Sarah, a small business owner, plans to sell her shares and realize a $300,000 capital gain in 2024. Currently, inclusion at ½ means $150,000 is taxable. Post-Jan 1, 2026, for gains over $250,000, she may have to include $33,333 extra if ⅔ rate applies to portion above threshold—i.e. gains over $250,000 taxed more heavily. By selling in 2025, she locks in inclusion at ½.
What to Watch for Going into 2026
- Keep an eye on whether draft legislation becomes law. Rights and obligations will hinge on law, not proposals, even if many details have already been public.
- Monitor updates to CRA’s forms and guides—updated T4037 guide and schedule lines are updated as early as last week (per CRA resources) to reflect these proposals. (canada.ca)
- Be aware of phase-outs and thresholds—$250,000 cap, and only certain property types qualify for LCGE. Structuring matters.
Actionable Checklist
- Confirm anticipated gains and estimated tax hit under both inclusion rates.
- If planning property dispositions or asset sales, accelerate if gains likely to be high.
- Use LCGE where eligible.
- Track and document eligible properties, meeting holding periods.
- Consult tax advisors early to model different outcomes.
By staying on top of these timing-based rules, individuals can make informed decisions to minimize tax liability under the revised regime, especially in the transition into 2026 when new rates become effective.