Capital Gains Tax Changes in Canada 2026: What Small Business Owners Need to Know
Reviewed by Bader A. Chowdry, CPA, CA, LPA on May 31, 2026.
— Key facts (2026)
- Capital gains inclusion rate stays at 50% — the proposed two-thirds increase was cancelled by the Department of Finance in March 2025.
- Lifetime Capital Gains Exemption (LCGE) is $1,275,000 in 2026 — 2.0% indexation applied to the Budget 2024 base of $1.25 million (ITA s.110.6).
- The Canadian Entrepreneurs Incentive (CEI) was cancelled in Budget 2025 and never enacted — do not rely on the 33.33% inclusion rate it once proposed.
- Combined Ontario top rate on capital gains: 26.76% at 50% inclusion (53.53% top marginal × 0.50) for taxpayers above the $246,752 federal bracket.
- QSBC test requires 90% active-business asset use at sale and 50%+ for the prior 24 months (ITA s.110.6(1)).
If you sold business shares, investment real estate, or any other capital asset in Canada in 2026, the rules that apply today are dramatically simpler than the political back-and-forth of the last two years suggested. The proposed two-thirds inclusion rate hike was cancelled by the Department of Finance on March 21, 2025. The Canadian Entrepreneurs Incentive (CEI) was removed in Budget 2025 and never enacted. The Lifetime Capital Gains Exemption, however, did rise — to $1,275,000 for 2026 after 2.0% indexation (Budget 2024 base × CPI factor).
This guide explains exactly where small-business capital gains tax stands in Canada for 2026, what the indexed Lifetime Capital Gains Exemption (LCGE) means for owner-managers planning a Qualified Small Business Corporation (QSBC) share sale, and the planning steps to take this year. Written by Bader A. Chowdry, CPA, CA, LPA — Licensed Public Accountant under the Public Accounting Act, 2004, S.O. 2004, c. 8.
Did the federal capital gains inclusion rate increase in 2026?
Quick answer: No. The proposed two-thirds inclusion rate from Budget 2024 was deferred to January 1, 2026, then formally cancelled by the Department of Finance on March 21, 2025. The 50% inclusion rate remains in effect for all individuals, trusts, and corporations across the entire 2026 taxation year. There is no $250,000 individual threshold to track — every capital gain is included at 50%.
What was originally proposed
The Liberal government in its April 2024 budget proposed raising the inclusion rate from 50% to 66.67% on net capital gains above $250,000 for individuals, and on all gains for corporations and most trusts. The change was to apply to dispositions on or after June 25, 2024. The Notice of Ways and Means Motion was tabled in September 2024 but never received Royal Assent.
The cancellation timeline
On January 31, 2025, the Department of Finance announced the implementation date would be pushed to January 1, 2026. On March 21, 2025, the federal government confirmed the increase would not proceed. The Canada Revenue Agency (CRA) updated its formal guidance shortly after, instructing taxpayers and tax preparers to file 2024 and 2025 returns at the 50% inclusion rate.
What this means for your 2026 capital gains
For an Ontario resident in the top federal bracket ($253,414+ in 2026), the effective combined federal-Ontario tax rate on a realized capital gain is 26.76% (53.53% top marginal × 50% inclusion). For a Canadian-Controlled Private Corporation (CCPC), the gain is taxed at the corporate aggregate-investment-income rate of roughly 50.17% in Ontario, with 30.67% recoverable through the Refundable Dividend Tax On Hand (RDTOH) mechanism on payment of an eligible dividend.
How much is the Lifetime Capital Gains Exemption in 2026?
Quick answer: The 2026 LCGE for shares of a Qualified Small Business Corporation (QSBC) is $1,275,000. This figure reflects 2.0% indexation applied by the CRA to the Budget 2024 base of $1.25 million (announced on April 16, 2024 and given effect by amendments to ITA s.110.6). For qualified farming or fishing property, the LCGE is also $1,275,000 — the historically higher farm/fishing exemption was harmonized with the QSBC exemption in 2014.
The indexation mechanic
Under ITA s.117.1, the LCGE is automatically indexed each year to the Consumer Price Index. The CRA publishes the indexed amount in its annual Line 25400 — Capital gains deduction guidance. For 2026 the indexation factor was 2.0%, raising the exemption from $1,250,000 (2024 onward base) to $1,275,000.
How the exemption is claimed
The LCGE is a deduction (not a credit) under ITA s.110.6(2.1) for QSBC shares. The taxable half of an eligible gain is added to taxable income, and the same amount — up to the lifetime cumulative limit — is deducted via Line 25400 of the T1 General. The mechanism uses an annual gains limit and a cumulative gains limit, both tracked on Form T657. Always file Schedule 3 reporting the disposition and Form T657 claiming the deduction in the same tax year.
Alternative Minimum Tax (AMT) interaction
Effective for tax years after December 31, 2023, the redesigned AMT regime (Bill C-69, Royal Assent June 20, 2024) restricts the LCGE deduction to 50% for AMT purposes. A taxpayer claiming the full $1,275,000 LCGE may still pay AMT in the year of sale, recoverable as a credit over the following seven years. CRA’s Folio S1-F2-C1 (Alternative Minimum Tax) documents the new computation. Model AMT on Form T691 before completing the sale.
Do I qualify for the LCGE on a sale of my private company shares?
Quick answer: You qualify if your shares meet the three QSBC tests in ITA s.110.6(1): (1) at sale, the corporation is a Canadian-Controlled Private Corporation (CCPC) using 90%+ of its assets in an active business carried on primarily in Canada; (2) for the 24 months immediately before sale, more than 50% of assets were so used; and (3) only you or a related party owned the shares for the entire 24-month holding period.
The 90% active-business test at the time of sale
“Active business assets” means cash and near-cash actively used in the business, accounts receivable, inventory, capital property (machinery, vehicles, buildings, leaseholds) used in business operations, and shares of connected active corporations. Excess cash, investment portfolios (marketable securities), and passive rental real estate are not active-business assets. The CRA’s Interpretation Bulletin IT-371R (archived) and Folio S4-F8-C1 set out the working test the auditor will apply.
The 24-month holding test
You must have owned the QSBC shares — or a related person must have owned them — for at least 24 months ending immediately before the disposition. New issuances of shares (e.g., a recent estate freeze where the children received freshly issued common shares) restart this clock. The 24-month rule is the single most common reason planned LCGE claims fail an audit. Plan share issuances well in advance of any anticipated sale.
The 50% asset-use test for 24 months
This test is gentler than the at-sale 90% test, but it still excludes companies that drifted into passive investment territory. If your company has been accumulating excess cash, holding marketable securities, or owning rental real estate beyond its working-capital needs, the 24-month asset-use test may fail. Purification strategies — paying a capital dividend, transferring passive assets to a separate Holdco, repaying shareholder loans, or buying active operating assets — must be completed more than 24 months before sale to be effective.
QSBC purification — work backwards from your target sale year
If your target exit is late 2027 or 2028, the purification window is now. Book a corporate-structure review with our team to model the 90%/50% asset ratios using your most recent year-end balance sheet, then plan the specific dividends, asset transfers, or s.85 rollovers needed to get there. Failed QSBC claims convert what should have been a tax-free $1.275M sheltered gain into a fully taxable gain at 26.76% — a real-dollar cost of approximately $341,000 per shareholder.
The Canadian Entrepreneurs Incentive (CEI): Cancelled in Budget 2025
The CEI was announced in Budget 2024 alongside the inclusion-rate increase. It would have offered a reduced inclusion rate of 33.33% on up to $2 million of qualifying business-share gains, phased in over a decade. Following the cancellation of the inclusion-rate increase in March 2025, the federal government confirmed in Budget 2025 (delivered November 4, 2025) that the CEI was being withdrawn and would not be enacted.
If you were modelling a sale under the CEI’s 33.33% rate, that planning is now obsolete. The LCGE at $1,275,000 plus the 50% inclusion rate is the operative regime for 2026 dispositions. Any draft sale agreements or earn-out structures that referenced the CEI inclusion rate should be re-reviewed.
Strategies to minimize capital gains tax in 2026
Multiplying the LCGE across family members
If you operate through a Holdco-Opco structure with a family trust, you can potentially multiply the LCGE — each adult beneficiary who owns QSBC shares through the trust can claim their own $1,275,000 exemption. Three adult beneficiaries = $3,825,000 in cumulative LCGE. The Tax on Split Income (TOSI) rules under ITA s.120.4 must be analysed carefully — capital gains realized by an “active business owner” excluded amount are generally TOSI-free, but the post-2017 changes make the analysis fact-specific. CRA’s Folio S1-F5-C1 covers the related-persons rules.
Section 85 rollovers for purification
An ITA s.85(1) rollover lets you transfer passive assets (excess cash, marketable securities, rental property) from Opco to a related Holdco on a tax-deferred basis. Properly executed — Form T2057 filed within the prescribed time and elected amounts within the s.85(1.1) acceptable range — the rollover purifies Opco’s balance sheet without triggering a deemed disposition. The Tax Court’s reasoning in Robertson v. The Queen, 2016 TCC 64, illustrates how a botched s.85 election can collapse the entire restructuring.
Capital gains reserves under ITA s.40(1)(a)(iii)
If you sell QSBC shares for a note payable over multiple years (e.g., vendor-take-back financing), you can claim a capital gains reserve to spread the gain — at minimum 20% per year over five years. For an arms-length sale to a child or grandchild of qualified family-business shares, the reserve period extends to 10 years under ITA s.40(1.1) — a planning option for genuine succession scenarios.
Donating publicly-listed securities
Under ITA s.38(a.1), a donation of publicly-listed securities to a registered Canadian charity is treated at a 0% inclusion rate. The donor receives a charitable tax credit for the fair market value and pays no tax on the embedded capital gain. For shareholders with appreciated public-company holdings inside their Holdco, this is one of the highest-impact planning moves available in 2026.
Year-end planning: What to do before December 31, 2026
The 2026 calendar year ends in seven months as of this writing. Owner-managers planning a sale, restructure, or succession should complete the following before year-end:
- Model AMT on Form T691 for any anticipated LCGE claim — the post-2024 AMT may apply even where regular tax does not.
- Reconcile your shareholder loan account — outstanding loans over the 12-month s.15(2) window become taxable shareholder benefits if not repaid by year-end of the lender’s tax year.
- Calculate your Capital Dividend Account (CDA) balance — the non-taxable half of any 2026 capital gains gets added to the CDA, available for tax-free distribution to Canadian-resident shareholders via Form T2054 election under ITA s.83(2).
- Update your shareholder agreement — confirm any drag-along, tag-along, or buy-sell provisions are consistent with a QSBC-share treatment on exit.
- File T1135 if needed — Canadian taxpayers with specified foreign property over $100,000 cost base at any time in the year must file by April 30, 2027.
A 60-minute working session with a Licensed Public Accountant in November or early December typically surfaces between two and five planning items that materially change a shareholder’s effective tax rate on a 2026 disposition. Book a discovery call if you would like our team to run the analysis on your structure.
Important — informational only, not advice. Do not use this article to make any decision.
This article is published by Insight Accounting CPA Professional Corporation for general educational purposes only. It is not tax, legal, accounting, financial, or investment advice, and nothing in this article should be relied upon — by anyone, for any purpose — to make a business, tax, financial, accounting, legal, or investment decision.
Tax law, CRA administrative positions, court interpretations, and Ontario provincial rules change frequently, sometimes retroactively, and the content of this article may be incomplete, simplified, out of date, or wrong by the time you read it. The right answer for your specific situation depends on facts this article does not know — your structure, history, jurisdiction, filings, contracts, and goals.
Before acting, engage your own Chartered Professional Accountant or qualified advisor who has reviewed your specific circumstances in writing. Insight Accounting CPA Professional Corporation, the author, and any contributors expressly disclaim all liability — direct, indirect, or consequential — for any action taken or not taken on the basis of this content.
Insight Accounting CPA Professional Corporation is led by Bader A. Chowdry, CPA, CA, LPA — licensed by CPA Ontario under the Public Accounting Act, 2004. To engage us for situation-specific advice, book a free 30-minute discovery call.
This article is for general information only and does not constitute legal, tax, accounting, or investment advice. Tax legislation and CRA administrative positions change frequently; specific provisions discussed here may be amended, supplemented, or rescinded after the publication date. Reading this article does not create a client–accountant or professional engagement relationship with Insight Accounting CPA Professional Corporation or any of its principals. Capital gains and LCGE planning are highly fact-specific; please consult a Licensed Public Accountant or tax lawyer about your situation before taking action.