If you spent the last two years bracing for a two-thirds capital gains inclusion rate in Canada, you can exhale. The proposed hike — first pitched in the 2024 federal budget, then deferred, then administered anyway by the CRA for a stretch — was cancelled outright on March 21, 2025. Every dollar of capital gains you realize today is still included in income at the familiar rate of one-half.
But the story didn't end with the cancellation. One major sweetener survived: a much bigger lifetime capital gains exemption for small business owners. If you sell your company or a rental property in 2026, here is exactly where the rules stand, what each surviving measure is worth to you, and the planning mistakes that still trip up sellers every year.
What Actually Happened: A Two-Year Timeline in 60 Seconds
Understanding the timeline matters because you may still have paperwork — or a 2024 tax filing — from the chaotic middle period.
- April 2024: The federal budget proposes raising the capital gains inclusion rate from one-half to two-thirds on gains above $250,000 for individuals (and on all gains for corporations and most trusts), effective June 25, 2024.
- Summer–fall 2024: Draft legislation circulates, but Parliament never enacts it. The CRA nonetheless announces it will administer the higher rate based on a Notice of Ways and Means Motion — meaning taxpayers were expected to file as if the law had passed.
- January 31, 2025: With legislation still unenacted, the Finance Minister defers the effective date to January 1, 2026.
- March 21, 2025: Prime Minister Carney cancels the increase entirely. The CRA reverts to administering the enacted rate of one-half.
The practical result: the inclusion rate never legally changed, and it is one-half today for individuals, corporations, and trusts alike. If you filed a 2024 return that reported gains at the two-thirds rate, that filing deserves a second look with your accountant — an adjustment may be in order.
What Survived the Reversal (and What Didn't)
Cancellations usually take everything down with them. This one didn't.
Survived: the bigger lifetime capital gains exemption. Budget 2024 raised the lifetime capital gains exemption (LCGE) to $1.25 million on qualifying small business corporation shares and farm or fishing property, effective June 25, 2024 — and the government explicitly kept that increase. The limit is indexed to inflation starting in 2026, putting the 2026 ceiling at approximately $1,275,000. That is roughly a quarter-million dollars of additional tax-free gains compared with the old limit.
Cancelled: the Canadian Entrepreneurs' Incentive. This companion proposal would have cut the inclusion rate to one-third on up to $2 million of lifetime gains when an eligible entrepreneur sold a business. Budget 2025 confirms it will not proceed. Do not factor it into any sale planning.
Confirmed: bare-trust reporting stays deferred. Bare trust filing requirements are pushed to taxation years ending on or after December 31, 2026 — relevant if you hold a rental property or business assets inside a bare trust arrangement.
Selling Your Business: How to Use the $1.25 Million-Plus Exemption
The enlarged LCGE is the single most valuable surviving measure for owner-operators. On $1,275,000 of sheltered gains at a roughly 50% top marginal rate, the exemption is worth over $300,000 in avoided tax. But it only works if your shares qualify — and qualification is where sellers lose it.
The three QSBC tests your shares must pass
To claim the exemption on a share sale, the shares must be qualified small business corporation (QSBC) shares. Three tests apply:
- Small business corporation at sale. At the moment of disposition, the company must be a Canadian-controlled private corporation (CCPC), and at least 90% of the fair market value of its assets must be used in an active business carried on primarily in Canada. Cash and investments piled up inside the company are the classic failure point.
- The 24-month holding test. Throughout the 24 months before the sale, the shares must have been owned by you or related persons, and more than 50% of the corporation's assets must have been used in an active business. You cannot buy clean shares the month before closing and qualify.
- Individual resident in Canada. Only individuals (not corporations) claim the exemption, and only on eligible property — QSBC shares, qualified farm property, or qualified fishing property.
Purify before you sell
That 90% test at the time of sale ambushes more sellers than any other rule. Years of retained earnings sitting in a brokerage account inside the corporation, a rental condo held corporately, a shareholder loan receivable — all of it counts against the 90%. The standard fix is a purification: paying down debt, paying dividends or bonuses to strip passive assets, or moving non-active assets into a separate holding company well before the sale. Start this conversation with your advisor at least a year before a planned exit, because the 24-month test means last-minute shuffling often fails.
Two more things that shrink your room
- Cumulative net investment losses (CNIL). Past investment losses reduce your available exemption room. Pull your CRA notice of assessment history — the balance is tracked there.
- Allowable business investment losses (ABILs) previously claimed. These also grind down the exemption. If you wrote off a failed business investment years ago, your remaining LCGE room is smaller than the headline number.
Spread the remaining gain with the capital gains reserve
Gains above your exemption don't have to be recognized all at once if the buyer pays you over time. The capital gains reserve lets you spread recognition over up to five years (a minimum of 20% per year), which can keep you in lower brackets and defer tax. It pairs naturally with an earnout or vendor-take-back note — common in small-business sales.
Selling a Rental Property: Inclusion, Recapture, and the Flipping Rule
Rental property gets no LCGE, so every dollar of gain counts — at the one-half inclusion rate. Three mechanics decide your bill.
Capital gain vs. CCA recapture: they are taxed very differently
Only half your capital gain enters income. But capital cost allowance (CCA) recapture is fully taxable as ordinary income, with no one-half cushion. Every dollar of depreciation you claimed over the years comes back at 100% when you sell (to the extent sale proceeds restore the undepreciated capital cost). Before claiming CCA on a rental each year, run the math: the current-year deduction at your marginal rate versus full-rate recapture later. Many landlords in appreciating markets deliberately skip CCA for exactly this reason.
If the property sells for less than its remaining undepreciated capital cost, the difference is a terminal loss — fully deductible against other income. It is the mirror image of recapture and easy to miss on a quick sale.
Changed the property's use? The 45(2) and 45(3) elections
Converting a home into a rental (or a rental into your home) is normally a deemed disposition at fair market value — tax without a sale. Two elections blunt this:
- Subsection 45(2): home becomes a rental. You elect to defer the gain, keep designating the property as your principal residence for up to four more years, and report the rental income — but you cannot claim CCA while the election stands.
- Subsection 45(3): rental becomes your home. Available if you haven't claimed CCA since 1984; it lets you treat the property as your principal residence for up to four years before the move-in.
Both elections are filed with your return by letter — there is no prescribed form — and both are routinely missed by self-filers. A missed 45(2) election on a former home turned rental is one of the most expensive amateur mistakes in Canadian tax.
The principal residence exemption still requires paperwork
Selling a home that was your principal residence for every year you owned it? The gain is exempt — but since 2016 you must still report the sale and designate the property (Schedule T2091) or face a penalty and a denied exemption. If only part of the property earned income (a basement suite with no structural changes and no CCA claimed), CRA's administrative practice generally lets the whole property keep its principal-residence character.
Held it less than a year? The flipping rule may deny capital treatment entirely
Since 2023, a residential property flipping rule deems gains on housing held less than 12 months to be fully taxable business income — no one-half inclusion, no principal residence exemption — unless a qualifying life event (death, divorce, job relocation, insolvency, and similar) forced the sale. Accidental landlords who sell quickly after a move need to calendar this rule carefully.
The Bookkeeping Habits That Protect Your Adjusted Cost Base
Almost every dollar of tax in this article traces back to one number: your adjusted cost base (ACB). An understated ACB means an overstated gain, and CRA puts the burden of proof on you. Four habits pay for themselves:
- Keep capital improvements separate from repairs. A new roof or an addition raises your ACB and lowers your eventual gain; patching a leak is a current rental expense. Intermingling them in one "repairs" ledger guarantees you'll under-claim at sale time. Track capital spending per property, with invoices, from day one.
- Log every ACB adjustment event. Reinvested capital, deemed dispositions, stop-loss adjustments on transfers to a spouse or corporation, and principal-residence designation years all move the number. A running ACB ledger per property beats reconstructing a decade of history under audit pressure.
- Reconcile corporate assets annually against the 90% test. If you plan to sell your CCPC shares someday, a year-end snapshot of active versus passive assets shows whether purification is drifting out of reach — while there is still time to fix it.
- Keep sale and closing documents for at least seven years. Adjusted cost base records, 45(2)/45(3) election letters, T2091 designations, and vendor-take-back schedules all need to survive well past the filing year.
Plain-text, version-controlled records shine here: an ACB ledger in a text file carries its full history in every commit, so you can prove what you knew and when you knew it — exactly what an ACB dispute turns on.
Keep Your Capital-Gains Records Audit-Ready
Whether you are purifying a corporation for a $1.27 million tax-free share sale or tracking a rental property's cost base across a change in use, the tax outcome is decided by records you keep years before the sale. Beancount.io provides plain-text accounting that gives you complete transparency and control over your financial data — no black boxes, no vendor lock-in. Get started for free and see why developers and finance professionals are switching to plain-text accounting.
