Corporate Capital Gains Tax Canada: Expert Guide for Business Owners [2025]

Corporate capital gains tax in Canada is undergoing a significant transformation that will impact how businesses pay taxes on their profits from asset sales. The 2024 federal budget announced an increase in the capital gains inclusion rate from 50% to 66.6% for corporations and trusts, with implementation now deferred to January 1, 2026. Previously, only half of the total capital gains realized by corporations was considered when calculating capital gains tax.

This change is particularly important because the corporate tax rate on investment income already exceeds 50% in many provinces and is typically higher than the highest personal marginal tax rate. As a result, businesses need to understand that capital gains tax applies only to the profit earned from selling capital assets, not the total selling price. For example, corporations currently face a federal corporate tax rate starting at 38%, which after various reductions results in a net rate of 15% for standard corporations and 9% for Canadian-Controlled Private Corporations (CCPCs). In this comprehensive guide, we’ll explore everything business owners need to know about corporate capital gains tax in Canada, including calculation methods, tax planning strategies, and how to navigate these upcoming changes.

What are corporate capital gains?

When corporations sell assets at a price higher than what they paid, they generate corporate capital gains. Understanding how these gains are classified, calculated, and taxed is essential for business owners seeking to manage their tax obligations effectively.

Definition and examples of capital assets

Capital assets form the backbone of many business operations and investment portfolios. Essentially, these are long-term assets purchased primarily for investment purposes or to earn income, rather than for day-to-day operational needs. To qualify as a capital asset, the property typically must have a useful life exceeding one year and often costs more than CAD 696.68.

Common examples of capital assets include:

• Real properties such as land and buildings
• Personal properties like business equipment
• Financial instruments including shares, stocks, and bonds
• Goodwill
• Personal use properties

Unlike inventory or trading assets, capital assets remain on a company’s balance sheet for extended periods. These assets can be depreciated over several years, allowing businesses to distribute their cost over time rather than claiming the entire expense in a single year.

The adjusted cost base (ACB) represents the original purchase price of a capital asset plus additional costs associated with its acquisition. This includes expenses incurred when acquiring the asset, commissions, legal fees, and costs related to improvements. However, regular maintenance and repair expenses are not included in the ACB calculation.

Difference between realized and unrealized gains

The distinction between realized and unrealized gains is fundamental in understanding how and when corporate capital gains are taxed. A realized gain occurs when a corporation actually sells a capital asset for more than its adjusted cost base plus outlays and expenses incurred to sell the property. At this point, the gain becomes “real” and subject to taxation.

Conversely, an unrealized gain (sometimes called a “paper gain”) exists only theoretically. For instance, if your corporation owns land that has appreciated in value but hasn’t been sold yet, that appreciation represents an unrealized gain. Although the asset may be carried on your balance sheet at fair market value, which might be substantially higher than its original cost, no taxable event has occurred.

Fundamentally, corporate capital gains tax is only applicable to realized gains. Even if your corporation estimates that an asset is worth more than its purchase price, no tax obligation exists until the asset is actually sold and the profit is received. This timing aspect provides corporations with strategic flexibility in managing when to trigger tax events.

How corporate capital gains differ from personal gains

Despite similarities in concept, corporate capital gains taxation differs significantly from personal capital gains taxation in several important ways. For corporations, capital gains create a more complex tax scenario with both immediate tax implications and potential future benefits.

Currently, only half (50%) of a corporation’s capital gains are taxable, similar to the personal inclusion rate. This taxable portion is included in the corporation’s income and taxed at ordinary corporate tax rates. While individuals pay capital gains tax at their personal income tax rates, corporations pay at corporate rates, which can exceed 50% in many provinces.

One unique advantage for corporations involves the Capital Dividend Account (CDA), a notional account that includes the non-taxable portion of all capital gains. Although no money is actually paid into this account, it allows corporations to pay tax-free capital dividends to shareholders, up to the balance in the CDA. This represents a significant benefit for corporate shareholders not available to individual investors.

Additionally, corporations can manage capital losses differently. Capital losses are typically only deductible against capital gains. If a corporation’s allowable capital losses exceed its taxable capital gains in a given year, the excess can be carried back three years or carried forward indefinitely to offset future capital gains. This carry-over provision offers valuable tax planning opportunities for businesses experiencing fluctuating profitability.

Moreover, corporate capital gains taxation includes a refundable tax component. A portion of the tax paid on capital gains is added to the Non-Eligible Refundable Dividend Tax On Hand (NERDTOH) account. This amount becomes refundable when the corporation pays taxable dividends to shareholders, creating another layer of tax planning considerations unique to the corporate environment.

Nevertheless, it’s worth noting that overall, it can be more advantageous for individuals to earn investment income personally rather than through a Canadian-Controlled Private Corporation (CCPC) when planning to distribute earnings as dividends.

Understanding the 2025 capital gains tax update

The regulatory landscape for corporate capital gains taxation in Canada has been evolving rapidly since 2024. Major policy shifts have created both uncertainty and strategic planning opportunities for business owners across the country.

New inclusion rate: 66.67% explained

The 2024 federal budget initially proposed increasing the capital gains inclusion rate from 50% to 66.67%. This change would fundamentally alter how much of a capital gain becomes taxable income. Under this proposed framework:

• For corporations and most trusts: 66.67% of all capital gains would be included in taxable income
• For individuals: 66.67% inclusion rate would apply only to capital gains exceeding CAD 348,340.05 annually

This higher inclusion rate represents a 33% increase in the taxable portion compared to the current system. Consequently, corporations would face substantially higher tax bills on asset dispositions without any exemption threshold.

To illustrate this impact: A corporation realizing a CAD 557,344.08 capital gain would have CAD 371,563.38 included in taxable income under the new 66.67% rate, compared to just CAD 278,672.04 under the current 50% rate.

The government simultaneously announced several compensatory measures, primarily:

• Increasing the Lifetime Capital Gains Exemption (LCGE) to CAD 1.74 million (from CAD 1.42 million) for qualifying small business shares and farming/fishing property
• Creating a new Canadian Entrepreneurs’ Incentive reducing the inclusion rate to 33.33% on up to CAD 2.79 million in eligible capital gains

Effective date and transition rules

The implementation timeline for these changes has been exceptionally fluid. Initially set for June 25, 2024, the effective date was subsequently deferred to January 1, 2026. Furthermore, on March 21, 2025, Prime Minister Mark Carney announced the government would “cancel the proposed hike in the capital gains inclusion rate”.

As of this writing, the Canada Revenue Agency has reverted to administering the currently enacted 50% inclusion rate. This means all capital gains realized before January 1, 2026, remain subject to the 50% inclusion rate, unless future legislation changes this approach.

The LCGE increase to CAD 1.74 million, nonetheless, remains scheduled to take effect June 25, 2024. This creates a unique situation where one element of the tax package is proceeding while the core rate change has been deferred or potentially canceled.

For taxation years spanning the implementation date, specific transition rules were designed:

1. Different inclusion rates would apply to gains realized before and after the effective date
2. For corporations with gains in both periods, a blended inclusion rate would apply
3. Capital dividend account (CDA) calculations would reflect the different inclusion rates based on when dispositions occurred

Comparison with previous tax rules

The current capital gains tax regime has remained largely unchanged since 2000, with 50% of capital gains being taxable for both individuals and corporations. The proposed 66.67% inclusion rate would mark the most significant modification to capital gains taxation in over two decades.

Key differences between the current and proposed systems include:

The proposed changes would have created a more progressive system for individuals while increasing the tax burden on corporations. Small business owners could have benefited from the enhanced LCGE and entrepreneur incentives, yet simultaneously faced higher taxes on regular capital gains.

Given the cancelation announcement, business owners should remain vigilant about potential future changes. The government has indicated its intention to maintain the LCGE increase regardless of what happens with the inclusion rate.

Who is affected by the new capital gains tax rules?

The sweeping changes to capital gains taxation affect various stakeholders differently across the Canadian economic landscape. From large corporations to individual entrepreneurs, understanding exactly who faces increased tax burdens—and who might benefit—is crucial for effective financial planning.

Corporations and trusts

Corporations and most trusts face the most significant impact from the proposed capital gains tax changes. Under the new rules, these entities would be required to include 66.67% of all capital gains in their taxable income, up from the current 50% inclusion rate. Most importantly, corporations and trusts won’t benefit from any exemption threshold that individuals receive.

To put this into perspective, imagine a corporation realizing a capital gain of CAD 418,008.06:

• Under the previous system: CAD 209,004.03 (50%) would be taxable
• Under the new system: CAD 278,685.97 (66.67%) would be taxable

This 33% increase in taxable capital gains directly impacts corporate cash flow and after-tax returns on investments. First of all, this change affects all types of corporations regardless of size or industry, making it a universal consideration for business planning.

The timing of these changes remains in flux. Initially set to take effect June 25, 2024, the implementation was subsequently deferred to January 1, 2026. In fact, as of March 21, 2025, the government announced it does not intend to proceed with the proposed increase to the capital gains inclusion rate, meaning the inclusion rate for 2024 remains at 50%.

High-income individuals

Individual taxpayers face a more nuanced situation. The proposed changes would introduce a two-tier system where:

• Capital gains under CAD 348,340.05 annually would remain at the 50% inclusion rate
• Capital gains exceeding this threshold would be taxed at the higher 66.67% inclusion rate

Importantly, this threshold applies to individuals either directly or indirectly through trusts or partnerships. Graduated rate estates (GREs) and qualified disability trusts (QDTs) would also be eligible for this CAD 348,340.05 threshold.

Given these points, high-income individuals with substantial investment portfolios or those planning to sell significant assets would feel the greatest impact. On balance, the threshold provision ensures that most middle-class Canadians would not pay additional tax when the inclusion rate increases.

An often overlooked consideration is that Alternative Minimum Tax (AMT) could still affect high-income earners even with the cancelation of the proposed inclusion rate increase. This parallel tax calculation might trigger higher tax obligations for those realizing substantial capital gains.

Small business owners

Small business owners occupy a unique position with both challenges and opportunities arising from the tax changes. In reality, many small business owners will benefit from complementary measures introduced alongside the inclusion rate change:

• The Lifetime Capital Gains Exemption (LCGE) limit increasing to CAD 1.74 million (from CAD 1.42 million) effective June 25, 2024[142]
• A new Canadian Entrepreneurs’ Incentive reducing the inclusion rate to one-third on a lifetime maximum of CAD 2.79 million in eligible capital gains

These provisions create what the Canadian Federation of Independent Business categorizes as “winners and losers”:

Winners include:

• Business owners selling incorporated business shares between CAD 1.39 million and CAD 3.14 million
• Entrepreneurs qualifying for the new Canadian Entrepreneurs’ Incentive

Losers include:

• Corporations with capital gains on investments intended for retirement or reinvestment
• Businesses selling above CAD 8.71 million (by 2029)
• Certain sectors including restaurants, hotels, arts, entertainment, recreation, finance, insurance, real estate firms, and professional corporations

In addition, small business owners benefit from the provision that allows owners selling their businesses to receive CAD 348,340.05 at the 50% inclusion rate, which can be combined with the LCGE and Entrepreneurs’ Incentive.

How to calculate corporate capital gains

Calculating corporate capital gains accurately is crucial for proper tax reporting and effective financial planning. Doing so involves understanding several key components that determine the final taxable amount.

Adjusted cost base (ACB)

The adjusted cost base represents the starting point for any capital gains calculation. Essentially, it’s the original cost of acquiring the property plus eligible expenses that increase its value over time. The ACB typically includes:

• The actual purchase price of the asset
• Commissions and legal fees paid during acquisition
• Capital expenditures that improve the property
• Costs of additions or permanent improvements

It’s important to note that regular maintenance and repair costs—considered current expenses—cannot be added to the ACB. For example, if your corporation purchases a building for CAD 139,336.02 and spends CAD 69,668.01 on adding a closed garage, your ACB would be CAD 209,004.03.

When calculating capital gains on foreign assets, you must convert the ACB using the exchange rate in effect when you acquired the property.

Outlays and expenses

Outlays and expenses are costs incurred specifically when selling a capital property. These amounts can be deducted from the proceeds of disposition when calculating your capital gain or loss. Common examples include:

• Fixing-up expenses to prepare the property for sale
• Finders’ fees and commissions
• Brokers’ and surveyors’ fees
• Legal fees related to the sale
• Transfer taxes and advertising costs

Unlike the ACB, which relates to acquisition, these expenses connect directly to the disposition process. Continuing our previous example, if you paid CAD 6,966.80 to a realtor and CAD 2,786.72 in legal fees to sell the property, these amounts would total CAD 9,753.52 in deductible outlays and expenses.

Proceeds of disposition

The proceeds of disposition generally refer to the amount received when selling a capital property. In most situations, this equals the sale price. Therefore, the basic formula for calculating capital gain is:

Capital Gain = Proceeds of Disposition – (ACB + Outlays and Expenses)

For instance, if you sold 400 shares of a Canadian corporation for CAD 9,056.84, paid a commission of CAD 83.60, and the ACB of the shares was CAD 5,573.44, your capital gain would be: CAD 9,056.84 – (CAD 5,573.44 + CAD 83.60) = CAD 3,399.80

In certain circumstances—such as when selling to a related party for less than fair market value—you must use the fair market value instead of the actual proceeds received.

Capital losses and carryovers

A capital loss occurs when you sell a capital property for less than its ACB plus the outlays and expenses incurred to sell it. These losses play a strategic role in tax planning, as they can offset capital gains.

When you have an allowable capital loss in a year, you must first apply it against your taxable capital gains for that same year. If you still have a remaining loss, it becomes part of your net capital loss for the year.

The real advantage comes with the carryover rules:

• You can carry losses back up to 3 years to reduce previous taxable capital gains
• You can carry losses forward indefinitely to offset future gains

To carry losses backward, complete Form T1A (Request for Loss Carryback). To carry them forward, complete Schedule 3 and attach it to your current tax return.

Importantly, for corporations, capital losses can generally only be used to offset capital gains, not other types of income. This makes strategic timing of asset sales especially important for corporate tax planning.

Federal and provincial capital gains tax rates

Tax rates on corporate capital gains across Canada form a complex landscape that varies significantly depending on location and business structure. Understanding these rates is vital for effective tax planning and financial decision-making.

Federal capital gains corporate tax rate

At the federal level, taxation of corporate capital gains follows a two-step process. Initially, only half (50%) of a corporation’s capital gain is included in taxable income under the current inclusion rate. This half is known as the “taxable capital gain.” Once included in income, this amount is subject to the federal corporate tax rate.

For investment income, including capital gains, the federal tax rate starts at 38.67%. This base rate is notably higher than the standard corporate income tax rates, reflecting the government’s approach to taxing passive investment income differently than active business income.

It’s worth pointing out that the federal government has proposed increasing the inclusion rate to 66.67% for all corporate capital gains starting January 1, 2026. This change would mean two-thirds of capital gains would become taxable instead of the current one-half, representing a 33% increase in the taxable portion.

Provincial variations across Canada

Capital gains tax rates differ markedly across provinces and territories. Below are the 2025 provincial investment income tax rates that apply to the taxable portion of capital gains:

As shown above, PEI has the highest provincial rate at 16%, whereas Alberta maintains the lowest at 8%.

Combined tax rate examples

Once federal and provincial rates are combined, the effective tax on capital gains becomes substantial. To calculate your corporation’s capital gains tax rate, multiply your combined federal and provincial investment income tax rate by the inclusion rate (currently 0.5 or 50%).

For example, an Ontario corporation with a capital gain would:

1. Apply the 50% inclusion rate to determine taxable capital gain
2. Apply the combined federal (38.67%) and Ontario (11.5%) rates, totaling 50.17%
3. The effective tax rate becomes 25.09% (50.17% × 0.5) on the total gain

Examining specific examples, we can see how combined rates affect different provinces:

• In Alberta, the combined rate on capital gains is approximately 23.34% (46.67% × 0.5)
• In British Columbia, it reaches 25.34% (50.67% × 0.5)
• In Newfoundland & Labrador, it climbs to 26.84% (53.67% × 0.5)

These rates highlight why many tax professionals consider capital gains taxation on corporate investment income in Canada to be among the highest globally. Furthermore, with the proposed inclusion rate increase to 66.67%, these effective rates would increase proportionally.

Tax planning strategies to reduce capital gains tax

With careful planning, corporations can minimize their capital gains tax burden through several proven strategies. Savvy business owners who implement these approaches can retain more of their investment returns and create long-term tax advantages.

Use of capital losses

First and foremost, offsetting capital gains with capital losses represents one of the most effective tax minimization techniques. When you sell a capital asset for less than its adjusted cost base plus selling expenses, you generate a capital loss. These losses must first be applied against capital gains in the same year, with any excess becoming part of your net capital loss for the year.

The strategic advantage comes from the carryover rules:

• You can carry losses back up to 3 years to offset previous gains
• You can carry losses forward indefinitely to reduce future capital gains

To carry losses backward, complete Form T1A (Request for Loss Carryback) without filing an amended return. For carrying losses forward, reference the balance on your Notice of Assessment and enter it on line 25300 of your current return.

Tax-efficient investment planning

Equally important is structuring your corporate investment portfolio to generate tax-preferred income. Capital gains receive more favorable tax treatment than interest income. By focusing on investments that produce capital gains rather than interest, you can significantly reduce your overall tax burden.

Consider these tax-efficient investment options:

• Stocks and equity ETFs
• Corporate-class mutual funds
• Real estate

These investments not only minimize your immediate tax obligations but also create Capital Dividend Account (CDA) credits, enabling tax-free withdrawals from your corporation.

Timing asset sales strategically

Thoughtful timing of asset sales can dramatically affect your tax outcomes. Consider selling assets in lower-income years to reduce your overall tax burden. Besides, delaying the realization of gains allows you to defer taxation until a more advantageous time.

For underperforming investments, tax loss harvesting—strategically selling assets at a loss to offset gains—can help manage your tax liability. This approach is particularly valuable when you’ve realized substantial gains elsewhere in your portfolio.

Utilizing the Capital Dividend Account (CDA)

The Capital Dividend Account represents a powerful tax planning tool unique to Canadian corporations. The non-taxable portion of capital gains (currently 50%) flows into this notional account. Corporations can then elect to pay capital dividends, up to the balance in the CDA, which shareholders receive completely tax-free.

As a rule of thumb, when your corporation realizes capital gains, it’s advisable to pay out the CDA balance promptly through tax-free capital dividends. If not distributed, 50% of any subsequent capital losses will reduce the CDA and diminish potential tax-free dividends.

Contact BOMCAS Canada today to schedule a consultation and ensure your corporate tax strategy is optimized for success.

Registered accounts and tax shelters

Beyond traditional tax planning methods, savvy business owners leverage specialized accounts and exemptions to mitigate capital gains tax. Understanding these tools can create substantial tax advantages for corporations and their shareholders.

RRSPs and TFSAs for business owners

Registered accounts offer unique tax advantages that complement corporate strategies. To begin with, Tax-Free Savings Accounts (TFSAs) provide completely tax-free growth and withdrawals, making them ideal for both short-term and long-term objectives. The annual contribution limit for 2025 stands at CAD 9,753.52, with unused room carrying forward indefinitely.

In contrast, Registered Retirement Savings Plans (RRSPs) offer immediate tax deductions for contributions but require eventual taxation on withdrawals. For business owners, RRSP contribution room is generated based on salary income (18% of earned income up to CAD 45,270.27), whereas dividends do not create RRSP room.

Certainly, funding these accounts from your corporation involves tax considerations:

• Corporate taxes on business income
• Personal taxes on dividends or salary used for contributions
• Tax-free or tax-deferred growth within accounts

How to use CDA and RDTOH accounts

The Capital Dividend Account (CDA) serves as a powerful tax integration mechanism, allowing private corporations to distribute tax-free dividends to shareholders. This notional account accumulates the non-taxable portion of capital gains (currently 50%).

Alongside CDA, the Refundable Dividend Tax on Hand (RDTOH) account accumulates refundable taxes paid by private corporations. Indeed, two types exist:

• Eligible RDTOH (ERDTOH): Generated primarily from dividend income
• Non-eligible RDTOH (NERDTOH): Generated from interest income or capital gains

RDTOH balances can be recovered when dividends are paid to shareholders, reducing the overall cost of withdrawing money from the corporation.

Lifetime Capital Gains Exemption (LCGE)

First and foremost, the LCGE provides a significant tax shield when selling qualified small business corporation shares. As of June 25, 2024, this exemption increased to CAD 1.74 million from CAD 1.39 million.

To qualify for this exemption, your business must meet specific criteria:

• Be a small business corporation with over 50% of assets used in active business for 24 months prior to sale
• Shares must not have been owned by anyone other than you or related persons in the 24-month period before sale

This lifetime cumulative limit allows business owners to shelter substantial gains from taxation. For instance, on a CAD 2.09 million profit from selling shares, the LCGE would reduce taxable income by approximately CAD 708,409.41.

Contact BOMCAS Canada today to determine how these tax shelters can be optimized for your specific situation.

Estate planning and long-term considerations

Estate planning stands as a critical consideration for business owners when addressing potential capital gains tax implications. Proper planning helps minimize tax burdens and ensures smooth asset transfers to the next generation.

Capital gains on death

Upon death, Canadian tax laws trigger a deemed disposition of all capital property at fair market value, even though no actual sale occurs. This means your corporation’s assets are considered sold immediately before death, potentially resulting in significant capital gains tax liability.

First and foremost, any inherent gains on these assets are subject to tax as a capital gain, which can exceed 25% in Ontario in 2024. Fortunately, one significant exception exists: assets transferred to a surviving spouse. This creates a tax deferral opportunity, postponing capital gains tax until the surviving spouse sells the assets or passes away.

For business owners holding private company shares, this deemed disposition can create a double taxation problem. The first tax occurs on the capital gain in the hands of the deceased shareholder, alongside a second tax on dividends received by the estate if corporate amounts are distributed after death.

Transferring assets to heirs

According to tax regulations, although the deemed disposition rule applies at death, specific planning opportunities exist. Namely, if your corporation qualifies as a small business corporation, your estate may utilize the Lifetime Capital Gains Exemption (LCGE) – now increased to CAD 1.74 million as of 2024.

To qualify for this exemption, shares must be of a Canadian-controlled private corporation where 90% or more of the value comes from assets used in active business operations in Canada. As a matter of fact, these shares only need to have qualified as QSBC shares at some point within 12 months prior to death.

Along with direct transfers, many business owners implement estate freezes during their lifetime. This strategy locks existing company value into preference shares held by the original shareholder while future growth accrues to new common shares held by family members or trusts.

Importance of having a will

Dying without a will (intestate) can create severe tax complications and family disputes. In such cases, provincial laws determine how assets are divided, which may not align with your wishes. For instance, when an individual dies intestate and is survived by a spouse and children, the estate divides between them based on provincial formulas.

Under Ontario’s intestacy rules, absent a proper will, premature capital gains taxes exceeding 11.5% of the estate’s value could become immediately payable upon death. Moreover, probate fees (roughly 1.5% of fair market value in Ontario) apply to all assets rather than just those requiring probate.

To avoid these issues, consider implementing a multiple will strategy – one for assets requiring probate (public will) and another for assets that don’t need probate, such as private corporation shares. This approach can significantly reduce probate fees while ensuring your business succession proceeds according to your wishes.

Conclusion

The Canadian corporate capital gains tax landscape continues to evolve, presenting both challenges and opportunities for business owners across the country. Undoubtedly, the proposed increase in the inclusion rate to 66.67% represents a significant shift that would fundamentally alter tax planning for corporations. Though currently deferred until January 2026, this change deserves careful consideration when making long-term business decisions.

Understanding the mechanics of corporate capital gains taxation remains essential regardless of these changes. Therefore, mastering concepts like adjusted cost base calculations, strategic use of capital losses, and proper timing of asset sales can significantly reduce your tax burden. The provincial variations in tax rates further highlight the need for location-specific planning, with effective rates ranging from 23.34% in Alberta to nearly 27% in provinces like Newfoundland & Labrador.

Tax-efficient investment strategies offer another powerful approach to managing capital gains. Above all, utilizing the Capital Dividend Account allows corporations to distribute the non-taxable portion of capital gains to shareholders completely tax-free. Similarly, the enhanced Lifetime Capital Gains Exemption (now $1.74 million) provides substantial protection when selling qualified small business shares.

Estate planning deserves equal attention since capital gains tax implications continue beyond a business owner’s lifetime. The deemed disposition rules can trigger significant tax liabilities unless proper planning occurs. Subsequently, implementing strategies like spousal transfers or estate freezes can defer or reduce these taxes while ensuring smooth business succession.

Capital gains tax planning requires a comprehensive approach that considers both immediate tax savings and long-term wealth preservation. Contact BOMCAS Canada today to schedule a consultation and ensure your corporate tax strategy is optimized for success. After all, proactive planning with expert guidance transforms tax challenges into strategic advantages that protect your business wealth for generations to come.

Key Takeaways

Understanding Canada’s evolving corporate capital gains tax landscape is crucial for business owners to optimize their tax strategies and protect their wealth in 2025 and beyond.

• Capital gains inclusion rate increase deferred: The proposed jump from 50% to 66.67% inclusion rate for corporations has been postponed to January 1, 2026, with the government announcing cancelation of the hike in March 2025.

• Strategic timing maximizes tax savings: Use capital losses to offset gains, time asset sales during lower-income years, and implement tax loss harvesting to significantly reduce your overall tax burden.

• Capital Dividend Account provides tax-free distributions: The non-taxable portion (50%) of corporate capital gains flows into CDA, allowing completely tax-free dividend payments to shareholders up to the account balance.

• Enhanced exemptions benefit small business owners: The Lifetime Capital Gains Exemption increased to $1.74 million in 2024, plus a new Canadian Entrepreneurs’ Incentive offers 33.33% inclusion rate on up to $2.79 million in eligible gains.

• Provincial rates create significant variations: Combined federal-provincial capital gains tax rates range from 23.34% in Alberta to nearly 27% in higher-tax provinces, making location-specific planning essential.

• Estate planning prevents costly tax surprises: Deemed disposition rules trigger capital gains tax on death, but spousal transfers and proper succession planning can defer taxes and ensure smooth asset transitions to heirs.

Proactive tax planning with professional guidance transforms these complex rules into strategic advantages that preserve more of your business wealth for the future.

FAQs

Q1. What changes are expected for corporate capital gains tax in Canada in 2025? While initially proposed to increase from 50% to 66.67%, the government announced in March 2025 that it does not intend to proceed with raising the capital gains inclusion rate. The rate for 2024 remains at 50%, but business owners should stay informed about potential future changes.

Q2. How is the corporate capital gains tax rate calculated in Canada? The corporate tax rate on capital gains is 50% of the combined federal and provincial investment income tax rates. For example, if the combined rate is 50%, the effective capital gains tax rate would be 25% of the total gain.

Q3. Is there a capital gains exemption for Canadian businesses? Yes, the Lifetime Capital Gains Exemption (LCGE) allows business owners to shelter up to $1.74 million (as of June 25, 2024) in capital gains from the sale of qualified small business corporation shares from taxation.

Q4. How can corporations minimize their capital gains tax burden? Strategies include using capital losses to offset gains, timing asset sales strategically, focusing on tax-efficient investments, and utilizing the Capital Dividend Account (CDA) to distribute tax-free dividends to shareholders.

Q5. What happens to corporate capital gains upon the death of a business owner? Upon death, there’s a deemed disposition of all capital property at fair market value, potentially triggering significant capital gains tax. However, proper estate planning, including spousal transfers and the use of multiple wills, can help defer or reduce these taxes.