Capital gains tax Canada: what it is and what small business owners need to know

Published Friday 31 July 2026

Table of contents

• What is capital gains tax in Canada?
• What is the capital gains tax rate in Canada?
• How to calculate capital gains tax
• Recent changes to capital gains tax in Canada
• The Lifetime Capital Gains Exemption (LCGE) for small businesses
• The Canada Entrepreneurs' Incentive (CEI): what happened?
• Capital gains when selling a business in Canada
• How to reduce capital gains tax as a small business owner
• Capital gains tax and your small business: common mistakes to avoid
• Simplify your small business finances with Xero
• FAQs on capital gains tax in Canada

Key takeaways

• Capital gains in Canada are taxed at a 50% inclusion rate, meaning only half of your gain gets added to your taxable income.
• The proposed increase to 66.67% was cancelled in March 2025, so the 50% rate stays in effect for the foreseeable future.
• The LCGE shelters up to $1,275,000 (indexed for 2026) in gains on qualifying small business corporation shares.
• Selling shares rather than assets, tracking your adjusted cost base, and meeting CCPC requirements can significantly reduce tax when you sell your business.

What is capital gains tax in Canada?

A capital gain happens when you sell an asset for more than you originally paid. Understanding how capital gains work is one of the first steps toward managing your tax obligations as a small business owner.

The difference between the sale price (known as the proceeds of disposition) and the original cost (called the adjusted cost base, or ACB) is your capital gain. Only realized gains are taxable, which means you don't owe tax until you actually sell or dispose of the asset.

Capital gains can come from several types of assets, including investments like stocks and bonds, real estate properties, and business shares. Capital gains aren't a separate tax. Instead, a portion of the gain is added to your regular income and taxed at your marginal rate.

How the capital gains inclusion rate works

The inclusion rate determines how much of your capital gain gets added to your taxable income. In Canada, the current inclusion rate is 50%.

That means if you realize a $200,000 capital gain, only $100,000 is added to your taxable income. You then pay tax on that $100,000 at your marginal rate, which depends on your total income and province or territory of residence.

What is the capital gains tax rate in Canada?

There's no single flat capital gains tax rate in Canada. The amount you pay depends on your marginal tax rate, which combines both federal and provincial rates.

Depending on your province and income level, your combined marginal tax rate can range from roughly 20% to 54%. Because only 50% of the gain is taxable, the effective tax rate on a capital gain falls between about 10% and 27%.

Here's a worked example. Say you're a small business owner in Ontario with $110,000 in regular income and you realize a $100,000 capital gain. The taxable portion is $50,000 (50% inclusion). At Ontario's combined marginal rates for that income bracket, you'd pay approximately $21,705 in tax on the gain.

Corporations follow the same 50% inclusion rate but benefit from lower corporate tax rates. The non-taxable half of a capital gain flows into the corporation's capital dividend account, which allows it to be distributed to shareholders tax-free.

How to calculate capital gains tax

Calculating your capital gains tax involves a few straightforward steps. Follow this process to determine how much you owe.

1. Determine your adjusted cost base (ACB), which includes the original purchase price plus any costs to acquire the asset.
2. Subtract your ACB and any selling expenses (such as legal fees or commissions) from the proceeds of disposition to find your total capital gain.
3. Apply the 50% inclusion rate to your capital gain to get the taxable capital gain
4. Add the taxable capital gain to your other income for the year.
5. Calculate the tax owing at your marginal rate (federal plus provincial).

For example, say you bought a commercial property for $150,000 and sold it for $250,000, paying $5,000 in legal and selling fees. Your capital gain is $95,000 ($250,000 minus $150,000 minus $5,000). The taxable portion at 50% inclusion is $47,500. At a combined marginal rate of roughly 40%, you'd owe approximately $19,000 in tax on the gain.

Recent changes to capital gains tax in Canada

The 2024 federal budget proposed raising the inclusion rate from 50% to 66.67% for capital gains above $250,000, originally set to take effect on 25 June 2024. That date was later deferred to 1 January 2026. On 21 March 2025, Prime Minister Carney announced the proposed increase was cancelled entirely.

The 50% inclusion rate remains in effect, and the Lifetime Capital Gains Exemption (LCGE) was increased to $1.25 million (indexed to $1,275,000 for inflation in 2026). The proposed Canada Entrepreneurs' Incentive (CEI) was also cancelled as part of the 2025 federal budget.

The cancellation gives business owners planning a sale or succession more certainty. You can continue to rely on the 50% inclusion rate without needing to rush the timing of a business sale or asset disposition.

The Lifetime Capital Gains Exemption (LCGE) for small businesses

The LCGE is one of the most valuable tax benefits available to Canadian small business owners. It allows you to shelter a significant portion of your capital gains from tax when you sell qualifying assets.

For 2026, the LCGE limit is $1,275,000. This is a lifetime cumulative amount, meaning it applies across all qualifying dispositions over your lifetime rather than per transaction. Qualifying assets include qualified small business corporation (QSBC) shares, qualified farm property, and qualified fishing property.

How to qualify for the small business capital gains exemption

Meeting the qualification requirements takes advance planning. Your shares must meet several criteria at the time of sale to be eligible.

• The business must be a Canadian-controlled private corporation (CCPC).
• You need to sell shares, not individual business assets, because only share sales qualify for the LCGE.
• At least 50% of the corporation's assets must have been used in an active business for the 24 months leading up to the sale.
• You or a related person must have held the shares for at least 24 months before the sale.

Planning ahead is essential, because failing to meet any one of these conditions disqualifies the entire exemption.

The Canada Entrepreneurs' Incentive (CEI): What happened?

The CEI was proposed in the 2024 federal budget as a new tax benefit for entrepreneurs selling qualifying businesses. It would have reduced the capital gains inclusion rate to 33.3% on up to $2 million in lifetime eligible gains, phased in over several years.

However, the CEI was cancelled as part of the 2025 federal budget. Because the underlying legislation for the capital gains inclusion rate changes never received Royal Assent, the CEI was eliminated along with the proposed rate hike.

If you'd been counting on the CEI as part of your business sale planning, the LCGE remains your primary tool for sheltering capital gains. Speak with a tax professional about other strategies to reduce your tax on a business sale.

Capital gains when selling a business in Canada

How you structure the sale of your business has a major impact on how much tax you pay. The two main options are a share sale and an asset sale.

In a share sale, you sell your ownership interest in the corporation. This approach can qualify for the LCGE, which can significantly reduce or eliminate the tax on your gain. In an asset sale, the corporation sells its individual assets (equipment, inventory, goodwill). Asset sales don't qualify for the LCGE, and gains are taxed inside the corporation first.

If your corporation has built up a capital dividend account from previous capital gains, you can distribute the non-taxable portion of those gains to shareholders tax-free. Given the complexity involved, working with a tax professional or accountant before selling is strongly recommended.

How to reduce capital gains tax as a small business owner

Several strategies can help you keep more of the proceeds when you sell business assets or shares. Consider these approaches as part of your tax planning.

• Claim the LCGE on qualifying small business corporation shares to shelter up to $1,275,000 in gains.
• Distribute non-taxable capital gains through the capital dividend account to shareholders tax-free.
• Time your sale strategically to a year when your other income is lower, reducing your marginal rate.
• Contribute to tax-sheltered accounts like a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) to offset taxable income.
• Use tax-loss harvesting by selling underperforming investments at a loss to offset capital gains in the same year.
• Work with a professional on estate planning to structure transfers and succession in a tax-efficient way.

Here’s a guide to getting your business books in order for the fiscal year-end.

Capital gains tax and your small business: common mistakes to avoid

Avoiding a few common pitfalls can save you thousands in unnecessary tax. Watch out for these mistakes when planning a business sale or asset disposition.

• failing to qualify your corporation as a QSBC before the sale, which disqualifies the LCGE entirely
• selling assets instead of shares, which eliminates access to the LCGE
• not tracking your adjusted cost base accurately over time, leading to a higher reported gain
• ignoring the 24-month holding period and active business asset requirements until it's too late
• timing the sale poorly, such as in a year when your other income pushes you into a higher tax bracket

Simplify your small business finances with Xero

Keeping your financial records organized throughout the year makes tax time far less stressful. Cloud accounting software helps you track income, expenses, and asset costs in one place so you're always prepared.

Xero helps small business owners manage invoicing, expenses, bank reconciliation, and financial reporting from a single platform. With real-time visibility into your finances, you can make confident decisions about your business, including when and how to plan for capital gains.

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FAQs on capital gains tax in Canada

Here are answers to common questions about capital gains tax for Canadian small business owners.

Do you pay capital gains tax on your primary residence in Canada?

Your primary residence is generally exempt from capital gains tax under the principal residence exemption. If you used part of your home for business, that portion may not qualify for the full exemption.

Can you carry capital losses forward in Canada?

Yes, net capital losses can be carried back three years or carried forward indefinitely to offset capital gains in other tax years.

Are capital gains taxed differently for corporations and individuals?

Both use the 50% inclusion rate, but corporations pay tax at lower corporate rates. The non-taxable half flows into the capital dividend account for tax-free distribution to shareholders.

What happens if you inherit property with a capital gain?

The deceased is deemed to have sold the property at fair market value immediately before death, which may trigger a capital gain on their final tax return. You receive the property at that fair market value as your new ACB.

Is the $250,000 threshold for the higher inclusion rate still relevant?

No. The proposed 66.67% inclusion rate on gains above $250,000 was cancelled in March 2025. All capital gains continue to be taxed at the 50% inclusion rate regardless of the amount.

Can you split capital gains with a spouse in Canada?

Attribution rules generally prevent income splitting on capital gains. However, if your spouse invests their own earned income or you use a prescribed-rate loan, gains on those investments can be attributed to them.

Do you need to report capital gains if you don't owe any tax?

Yes, you must report all capital gains and losses on your tax return even if the LCGE or losses reduce your tax to zero. Failing to report can affect your eligibility for future claims.

When is capital gains tax due in Canada?

Capital gains are reported on your annual tax return, which is due by 30 April for most individuals or 15 June if you're self-employed. Any tax owing is still due by 30 April regardless of your filing deadline.