What’s Changing with Capital Gains Inclusion Rate
Starting January 1, 2026, capital gains realized in excess of $250,000 annually by individuals, and all capital gains realized by corporations and most trusts, will be taxed at an inclusion rate of two-thirds instead of the current one-half. (canada.ca)
This means you’ll declare two-thirds of your capital gain as taxable income (rather than 50%), up to the thresholds and in applicable entities. The change is proposed via draft legislation. (canada.ca)
Who’s Affected
- Individuals with capital gains over $250,000 in a year will face higher taxation on gains above that threshold. (canada.ca)
- Corporations and most trusts are impacted on all capital gains starting the effective date. (canada.ca)
- Capital gains realized before January 1, 2026 remain taxed under the one-half inclusion rate. (canada.ca)
What Remains the Same or Is Added
- The Lifetime Capital Gains Exemption (LCGE) is being raised to $1.25 million for eligible properties like small business shares, and will continue indexing from 2026 forward. (canada.ca)
- A new Entrepreneurs’ Incentive will let qualifying individuals reduce the inclusion rate to one-third on up to $2 million in eligible capital gains. That applies first in 2025 and ramps up to $2 million by 2029. (canada.ca)
Planning Strategies Before Jan 1, 2026
- Accelerate dispositions: If you have gains above $250,000 or operate through a corporation/trust, consider realizing gains before 2026 to benefit from the lower inclusion rate.
- Use the LCGE: If eligible, structure your dispositions to maximise this exemption. It’s particularly useful for farmers, fishers, and small business owners.
- Consider entity conversion: Evaluate whether it makes sense to shift certain assets or operations under a trust or corporation before the law changes.
- Coordinate with your financial year-end: If your fiscal year ends late in 2025, timing may let you avoid some exposure. Work with accountants to model scenarios.
Risks and Cautions
- If legislation fails to receive Royal Assent, tax returns filed under assumptions of the new rate could be reassessed.
- The entrepreneurial incentive has a phase-in schedule; early planning is essential to access full future benefits.
- For corporations or trusts, additional administrative burdens and record-keeping will accompany the new regime. Ensure compliance systems are updated.
Practical Example
Imagine Jane Smith, an individual investor, realises $400,000 in capital gains in 2026. Under the proposed regime:
- First $250,000 taxed at 50% inclusion rate
- Remaining $150,000 taxed at 66.67% inclusion rate
- If Jane is eligible and uses the Entrepreneurs’ Incentive (say she often sells eligible small business shares), a portion of that gain might qualify for a one-third inclusion.
- Compare what would’ve been payable under current law vs new to see real dollar impact, then consider whether some gains can be harvested in 2025 instead.
Key Takeaways
- The one-half to two-thirds jump will significantly affect individuals with large gains and many corporations.
- Take advantage of existing exemptions and incentives before 2026.
- Work with a tax advisor to time dispositions, structure your entity, and update financial plans.
- Stay tuned for finalized legislation and CRA guidance to ensure compliance.