If you have been following the news about Canadian tax changes, you have probably heard about the new capital gains inclusion rate. It is one of the most significant tax changes in recent years, and it affects anyone who sells investments, rental properties, or business assets at a profit. But the details matter, and a lot of the coverage has been confusing or incomplete.
Let us break it down simply so you know exactly what has changed, who it affects, and what you can do about it.
What Is a Capital Gain?
A capital gain is the profit you make when you sell an asset for more than you paid for it. If you bought shares in a company for $50,000 and sold them for $80,000, your capital gain is $30,000. If you bought a rental property for $300,000 and sold it for $500,000 (after selling costs), your capital gain is $200,000.
Not all of a capital gain is taxed. Only a portion of it — called the "inclusion rate" — gets added to your income. The rest is tax-free. This is where the 2025 changes come in.
The Old Rules vs. the New Rules
Under the old rules (before 2025), the capital gains inclusion rate was 50% for everyone. So if you had a $100,000 capital gain, $50,000 would be added to your taxable income. Simple.
Under the new rules for 2025 and beyond, it works like this for individuals:
- First $250,000 of capital gains in a year: 50% inclusion rate (same as before)
- Capital gains above $250,000 in a year: 66.67% (two-thirds) inclusion rate
For corporations and trusts, the higher 66.67% rate applies from the first dollar of capital gains — there is no $250,000 threshold.
So for most people with modest investment gains — selling some shares, cashing out a small portfolio — nothing has changed. You only pay more if your capital gains in a single year exceed $250,000.
Who Is Actually Affected?
The $250,000 threshold is per year, per individual. In practical terms, this mainly affects:
- People selling rental or investment properties. If your rental property has appreciated significantly, the gain on sale could easily exceed $250,000. Our rental property tax calculator can help you estimate the tax on a property sale.
- Business owners selling their business. Selling a business you built over decades could result in gains well above $250,000. However, the Lifetime Capital Gains Exemption (LCGE) may shelter some or all of the gain — more on that below.
- People with large investment portfolios. If you sell a significant amount of stocks or other investments in a single year, you could exceed the threshold.
- Corporations and trusts. Any capital gain realised inside a corporation is subject to the two-thirds inclusion rate from dollar one.
If you typically only have modest capital gains — say, selling a few thousand dollars worth of stocks or ETFs — this change does not affect you at all.
How Much More Tax Will You Pay?
Let us run through an example. Say you sell a rental property and make a $400,000 capital gain in 2025.
Under the old rules:
- $400,000 x 50% = $200,000 added to your taxable income
Under the new rules:
- First $250,000 x 50% = $125,000
- Remaining $150,000 x 66.67% = $100,005
- Total added to taxable income: $225,005
That is an extra $25,005 of taxable income. If your marginal tax rate is 45%, that works out to about $11,250 in additional tax compared to the old rules. It is real money, but it is not the dramatic increase that some headlines might suggest.
Use our capital gains tax calculator to run the numbers on your specific situation. It factors in both the old and new inclusion rates so you can see the difference.
The Lifetime Capital Gains Exemption (LCGE)
If you are selling qualifying small business corporation shares, qualified farm property, or qualified fishing property, the LCGE can shelter a significant amount of your gain from tax. For 2025, the LCGE has been increased to $1,250,000.
That means the first $1,250,000 of capital gains from qualifying dispositions is completely tax-free. This is a major benefit for entrepreneurs and farmers who sell their businesses. The increase from the previous limit of $1,016,836 provides an extra $233,164 of tax-free gains.
The LCGE applies before the inclusion rate, so if your gain is under $1,250,000 and your shares or property qualify, you pay zero capital gains tax regardless of the new inclusion rate.
The Canadian Entrepreneurs' Incentive
Starting in 2025, there is also a new Canadian Entrepreneurs' Incentive that provides an additional lifetime exemption of up to $2 million on the sale of qualifying small business shares. This is being phased in gradually, with $400,000 available in 2025 and increasing by $400,000 per year until it reaches the full $2 million.
For qualifying business owners, this means that capital gains up to $1,650,000 in 2025 ($1,250,000 LCGE + $400,000 Entrepreneurs' Incentive) could be tax-free or taxed at a reduced rate. The Entrepreneurs' Incentive applies a reduced inclusion rate of one-third (33.33%) rather than a full exemption.
Your Principal Residence Is Still Exempt
One thing that has not changed: the principal residence exemption still applies. If you sell the home you live in, any capital gain is completely tax-free as long as the property was your principal residence for every year you owned it. This is one of the most valuable tax exemptions in Canada, and it remains fully in place.
However, if you owned the property for part of the time as a rental or investment, or if you used part of it for business, only a portion of the gain may be exempt. The rules here can be complicated, so it is worth getting professional advice if your situation is not straightforward.
Strategies to Consider
Spread gains across years. Since the $250,000 threshold is annual, you might be able to reduce your tax by spreading a large gain across two or more tax years. For example, if you are selling a property with a large gain, consider whether an instalment sale or a different closing date could split the gain across calendar years.
Use capital losses to offset gains. If you have investments that are currently at a loss, selling them in the same year as a big gain can reduce your taxable capital gain. This is called tax-loss harvesting.
Maximise the LCGE. If you own qualifying small business shares, make sure you understand the requirements for the LCGE and plan accordingly. Getting professional advice before the sale can save you a lot of money.
Consider your investment structure. If you hold investments inside a corporation, the new two-thirds inclusion rate applies from the first dollar. It might make sense to review whether some investments should be held personally instead, to take advantage of the $250,000 annual threshold. Our investment income calculator can help you compare different scenarios.
The Bottom Line
The new capital gains inclusion rate is a meaningful change, but it only affects Canadians with capital gains above $250,000 in a single year. For most people with regular investment portfolios, nothing has changed. If you are planning a significant sale of property, investments, or business assets, it is worth running the numbers in advance and considering strategies to minimise the impact.
Our capital gains tax calculator is free and gives you an instant breakdown of what you would owe under the current rules. Try it with your numbers and see exactly where you stand.