Tax Planning Tips: How to Handle the Increase in Capital Gains Inclusion Rate (Effective Jan 1, 2026)

What’s Changing

Canada’s inclusion rate (the portion of capital gains that is taxable) is increasing from 50% to 66⅔% for:

• Corporations and most trusts for all capital gains; and
• Individuals for capital gains realized above $250,000 per year. (canada.ca)

The effective date of this new regime is January 1, 2026. Until then, the 50% inclusion rate continues to apply. (canada.ca)

Why It Matters

A higher inclusion rate means more taxable income from capital gains, increasing tax liability. For high net worth individuals, frequent traders, or owners of small businesses or farms, this can be a significant change. Planning ahead is critical.

Key Tax Planning Strategies

1. Accelerate Gains Realization Before 2026

   • If you expect large capital gains (e.g., from selling shares, real estate, or business assets), consider disposing before January 1, 2026 to benefit from the lower rate.
   • But weigh this against potential market risks, and tax planning should align with overall financial goals.

2. Track the $250,000 Threshold Wisely (Individuals)

   • If you can control timing or size of gains, aim to keep gains in 2026 and beyond below the $250,000 annual threshold.
   • Estimate gains from 2025 and early 2026 to see whether staying below the threshold or splitting sales between family members can help.

3. Use Lifetime Capital Gains Exemption (LCGE)

   • The LCGE has increased to $1.25 million for qualifying small business or farming/fishing property gains. (canada.ca)
   • Combine exemption and threshold planning: where possible, use the LCGE first to shelter eligible gains.

4. Prepare for Increased Form Complexity

   • The CRA has updated the “New for 2025” pages for capital gains and AMT changes. The forms and rules will reflect the inclusion rate changes. (canada.ca)
   • Some forms (e.g., stock option calculations, small business share dispositions) may require new schedules or detailed tracking between periods before and after June 25, 2024. (canada.ca)

Corporate-Focused Planning

• Corporations realize all capital gains at the higher inclusion rate starting Jan 1, 2026. Plan share sales, restructuring, or asset realization accordingly before the cutoff if possible.
• Review eligible small business corporation shares or qualifying farm/fishing/fishing properties to ensure eligibility for LCGE or other incentives.

Example Scenario

Jane, an individual, has realized $200,000 in capital gains in 2025 and expects another $100,000 in early 2026 (after Jan 1) from selling shares. Under the new rules:

• Jane’s total gains over $250,000 (here, $50,000) will be taxed at the two-thirds inclusion rate.
• The first $250,000 would remain effectively taxed at the old inclusion rate of 50%.
• If Jane holds sale until 2025 (before Jan 1), she could lock in the lower inclusion rate for more of the gains.

Action Steps Today

• Review your portfolio now and forecast potential capital gains before January 1, 2026.
• Consult with tax advisors to estimate marginal tax increases under proposed inclusion rate.
• Decide whether to dispose business shares or property earlier.
• Maintain documentation for all eligible dispositions, especially small business or farm property, to support LCGE claims.
• Keep up with legislative updates: proposed changes may still be adjusted before final enactment.

Bottom Line: The increase in the inclusion rate significantly changes the capital gains tax landscape. Plan proactively, leverage thresholds and exemptions, and timing is everything.