Understanding the Proposed Changes
Starting January 1, 2026, the inclusion rate on capital gains will change:
- For individuals, gains in excess of $250,000 annually will be taxed with two-thirds inclusion, up from the current one-half rate. (canada.ca)
- Corporations and most trusts will apply the two-thirds inclusion rate to all capital gains realized from that date. (canada.ca)
Additionally:
- The Lifetime Capital Gains Exemption (LCGE) limit is increasing to $1.25 million, effective June 25, 2024, still in effect. (canada.ca)
- A $250,000 annual threshold for individuals will allow modest capital gains—like those from a cottage sale—still to benefit from the current one-half rate. (canada.ca)
- A Canadian Entrepreneurs’ Incentive may reduce the inclusion rate to one-third on up to $2 million of eligible capital gains over a lifetime. (canada.ca)
Tax Planning Strategies Before the Change
1. Accelerate Gains into Current Periods
If you expect a capital gain where only the current rate (one-half) applies—especially if from selling a business, shares, or property—consider realizing it before January 1, 2026 to avoid higher inclusion. Corporations and trusts benefit from doing the same.
2. Segment Gains Across Taxpayers
Couples, family trusts, or multiple beneficiaries may spread gains among individuals to keep each taxpayer under the $250,000 individual threshold. This reduces exposure to the higher inclusion rate. Example: If spouses with equal incomes sell an asset gaining $400,000, transferring title (if legally permitted) may let each claim $200,000 under the lower threshold.
3. Leverage Lifetime Exemptions & Incentives
Maximize use of the LCGE where eligible. Start using the Canadian Entrepreneurs’ Incentive for gains that qualify—especially if eligible businesses or shares are involved. Timing matters: gains must occur after rules effective date to count.
4. Consider Corporations and Trust Electives
Corporations and trusts will see all gains taxed at two-thirds unless thresholds or incentives apply. For trusts holding assets, review whether distributions to beneficiaries reduce tax drag, or whether reorganizing ownership can shift exposure.
Examples
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Individual cottage sale: A taxpayer sells a non-principal cottage with $300,000 gain in 2025. All taxed at one-half inclusion rate—nice. If waited until 2026, first $250,000 taxed at half, remaining $50,000 taxed at two-thirds—worse outcome.
-
Small business shares: Owner has eligible gains of $1.5 million. Under LCGE at $1.25 million, first $1.25 million is exempt; remaining gains taxed at new inclusion rate. Use Entrepreneurs’ Incentive (if gains from eligible shares) to reduce inclusion further.
Actionable Insights & Checklist
| Action | Why It Matters |
|---|---|
| Review upcoming dispositions planned in 2025-2026 | Identify those you should do earlier to get lower rate |
| Consult your tax advisor to assess eligibility for LCGE & Entrepreneurs’ Incentive | Ensures you don’t miss critical qualification rules |
| Revisit trust or corporation structure | Helps reduce double taxation or inclusion exposure |
| Maintain good records of asset cost bases and ownership transfers | Critical when evaluating gains across taxpayers or entities |
Key Takeaways
- The proposed higher inclusion rate demands strategic timing for capital gains.
- Thresholds and exemptions are tools not often permanent—use while available.
- Entities like corporations and trusts must especially review how gains are realized.
- Overall, early, informed decisions now can save significant tax later.