Canada Small Business Tax Reform 2026: What You Need to Know

Many small business owners have read about big changes to the way Canada taxes capital gains. Several of those proposals did not go ahead. This guide explains what is in place for the 2026 tax year and what was dropped, so you do not plan around rules that do not apply.

Updated October 2026. General information only, not tax, legal or financial advice. Check canada.ca or talk to an accountant before you sell a business.

The Capital Gains Inclusion Rate Stays at 50%

In 2024 the federal government proposed raising the capital gains inclusion rate from one-half (50%) to two-thirds (66.7%) for corporations, most trusts and the part of an individual's gains above $250,000 a year. The start date was moved from June 25, 2024 to January 1, 2026. On March 21, 2025, the government announced that it would cancel the increase.

That means the inclusion rate remains one-half (50%) for individuals, corporations and trusts. For the 2026 tax year, half of a capital gain is taxable.

The Lifetime Capital Gains Exemption (LCGE): $1.275 Million in 2026

The lifetime capital gains exemption lets an individual exclude gains from the sale of qualified small business corporation shares and qualified farm or fishing property from tax. The government proposed raising the limit from $1 million to $1.25 million for sales on or after June 25, 2024, and said in March 2025 that it would keep this change. Indexation of the limit to inflation resumed in 2026, and the limit for 2026 is $1,275,000.

The Canadian Entrepreneurs' Incentive (CEI) Was Cancelled

The CEI was a proposal to lower the inclusion rate to one-third on up to $2 million of gains from selling shares in a small business, phased in from 2025. It was cancelled and will not be introduced, so you should not count on it in your plans.

Example: Selling a Business for $2 Million

This simple example assumes the shares qualify for the LCGE, you have not used any of your exemption before, and your adjusted cost base is zero.

The numbers do not include indexation of the exemption, provincial rules, alternative minimum tax or any other tax you may owe. An accountant can work out your real result.

Investments Held Inside a Corporation

Because the increase was cancelled, capital gains on investments or property held in a corporation are also taxed with a 50% inclusion rate. There is no $250,000 threshold to worry about.

Other Rules That Still Matter

• Short-term rentals: since 2024, you generally cannot deduct expenses for a short-term rental that does not follow local and provincial rules. This applies to individuals and businesses.
• Online mail: the CRA has been moving business correspondence to online mail. Keep your email address up to date in My Business Account.
• CPP: contribution limits change every year. For 2026 the first earnings ceiling is $74,600 and the second ceiling is $85,000.

Conclusion

The big capital gains changes you may have heard about, a higher inclusion rate and the CEI, are not part of the rules. The higher lifetime exemption for small business shares and farm or fishing property is. If you plan to sell a business, confirm the current LCGE limit with the CRA or an accountant first.

Related guides

• What is the Small Business Deduction in Canada?
• Best Bookkeeping Tips for Small Business Tax Savings in Canada
• Sole Proprietorship vs Incorporation Tax in Canada
• How to write off vehicle expenses for a business in Canada

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