Canada Capital Gains Inclusion Rate 2024 vs 2026: How the Proposed Hike and Rollback Affects Estates With $500,000 in Unrealized Gains
Key Takeaways
- 1Understanding canada capital gains inclusion rate 2024 vs 2026: how the proposed hike and rollback affects estates with $500,000 in unrealized gains is crucial for financial success
- 2Professional guidance can save thousands in taxes and fees
- 3Early planning leads to better outcomes
- 4GTA residents have unique considerations for
- 5Taking action now prevents costly mistakes later
Quick Summary
This article covers 5 key points about key takeaways, providing essential insights for informed decision-making.
$500,000 in Unrealized Gains and a Moving Target: The Inclusion Rate Timeline
A 74-year-old Ontario resident dies in early 2026 holding two major assets outside their principal residence: a Muskoka cottage purchased in 1998 for $180,000 (current FMV $480,000) and a non-registered stock portfolio with an adjusted cost base of $120,000 (current FMV $320,000). Total unrealized capital gains: $500,000.
The executor preparing the terminal T1 return faces a question that should be simple but became complicated in 2024: what fraction of this $500,000 gain is taxable? Is it 1/2 ($250,000 taxable) or 2/3 ($333,333 taxable)? The answer depends on a political timeline that whipsawed Canadian tax planning for 18 months.
The short answer for 2026: The inclusion rate is 1/2. The proposed 2/3 rate was never enacted into law. Executors filing terminal returns for deaths in 2025 and 2026 should apply the 1/2 rate. Executors who already filed at 2/3 should request a reassessment.
The Full Timeline: From Budget 2024 to the Rollback
Understanding how the inclusion rate proposal unfolded matters — not just for historical interest, but because executors who filed returns during the uncertainty period may need to amend them.
April 16, 2024: Budget 2024 Announcement
The federal government announced in Budget 2024 that the capital gains inclusion rate would increase from 1/2 to 2/3 for gains realized on or after June 25, 2024. For individuals, the first $250,000 in annual capital gains would remain at the 1/2 rate, with only the excess subject to 2/3 inclusion. For corporations and trusts, the 2/3 rate would apply from the first dollar.
June 25, 2024: Proposed Effective Date
The CRA began administering the higher rate as though it were law, following the standard practice of applying budget measures from their proposed effective date even before Royal Assent. Tax software was updated. Accountants filed returns using the 2/3 rate for gains realized after June 24, 2024. Some Canadians rushed to trigger deemed dispositions before the effective date to lock in the 1/2 rate.
Late 2024 to Early 2025: Legislative Stall
The enabling legislation (Bill C-59 and subsequent amendments) was not passed before Parliament was dissolved. The capital gains inclusion rate increase existed only as a budget proposal and CRA administrative policy — not as enacted law. This created an awkward period where the CRA was assessing returns at a rate that had no legislative authority.
2025: New Government, Formal Reversal
The government elected in 2025 confirmed that it would not reintroduce the 2/3 inclusion rate. The CRA subsequently updated its guidance to confirm that the 1/2 rate applies to all capital gains, including those realized between June 25, 2024 and the reversal announcement. Taxpayers who had been assessed at the higher rate were invited to request reassessments.
Worked Example: $500,000 Estate Gain Under Each Rate
Returning to our Ontario estate with $500,000 in unrealized capital gains (cottage + non-registered stocks), here is the tax calculation on the terminal T1 return under each inclusion rate.
Scenario A: 1/2 Inclusion Rate (Current Law)
- Total capital gain: $500,000
- Taxable capital gain (50%): $250,000
- Assumed other income on terminal return: $40,000 (CPP, OAS, pension)
- Total taxable income: $290,000
At Ontario's combined federal-provincial rates on $290,000 in total income, the tax attributable to the $250,000 capital gain portion is approximately:
- Income from $40,000 to $111,733: various rates averaging ~30% = ~$21,520
- $111,733 to $155,625: 33.89% = $14,876
- $155,625 to $220,000: 46.41% = $29,888
- $220,000 to $235,675: 49.97% = $7,828
- $235,675 to $290,000: 53.53% = $29,068
- Approximate tax on capital gain: $103,180
After tax, the estate retains approximately $396,820 from the $500,000 in gains (the original cost base of the assets plus the after-tax gain).
Scenario B: 2/3 Inclusion Rate (Proposed, Never Enacted)
- Total capital gain: $500,000
- First $250,000 at 1/2 rate (individual threshold): $125,000 taxable
- Remaining $250,000 at 2/3 rate: $166,667 taxable
- Total taxable capital gain: $291,667
- Assumed other income: $40,000
- Total taxable income: $331,667
At Ontario's combined rates on $331,667:
- Tax on income up to $290,000: ~$103,180 (same as Scenario A for the first $250,000 of taxable gain)
- $290,000 to $331,667 at 53.53%: $22,280
- Approximate total tax on capital gain: $130,830
The difference: $130,830 (2/3 rate) minus $103,180 (1/2 rate) = approximately $27,650 more tax under the proposed regime. On a $500,000 gain, the rollback saves the estate this amount — money that flows to the heirs instead of the CRA.
How the Deemed Disposition at Death Creates the Tax Event
Under subsection 70(5) of the Income Tax Act, a deceased person is deemed to have disposed of all capital property at fair market value immediately before death. This is not an actual sale — the assets remain in the estate — but the CRA treats it as though every asset was sold at its current value on the date of death.
For our $500,000 example, this means:
- Cottage: deemed proceeds of $480,000, ACB of $180,000, gain of $300,000
- Non-registered stocks: deemed proceeds of $320,000, ACB of $120,000, gain of $200,000
- Total deemed gain: $500,000 — reported on the deceased's final T1 return for the year of death
The inclusion rate determines how much of this $500,000 enters taxable income. At 1/2, it is $250,000. Under the proposed 2/3 rate with the $250,000 individual threshold, it would have been $291,667. The heirs receive the assets at a stepped-up cost base equal to the fair market value at death — but the estate must first pay the tax bill from liquid assets.
What Executors Who Filed at the 2/3 Rate Should Do Now
Between June 2024 and mid-2025, some executors filed terminal T1 returns or trust returns applying the 2/3 inclusion rate. If the CRA assessed those returns at the higher rate, the estate overpaid tax. Here is the process for correcting this:
Step 1: Determine If the Higher Rate Was Applied
Review the Notice of Assessment for the terminal return. Check the taxable capital gain amount — if it reflects 2/3 inclusion on any portion of the gains, an amendment is warranted.
Step 2: File a T1-ADJ (T1 Adjustment Request)
Submit a T1 Adjustment Request (Form T1-ADJ or through My Account/Represent a Client) for the relevant tax year. Specify that the capital gains inclusion rate should be 1/2 (50%) on the entire gain, not 2/3. Include the recalculated taxable income and tax payable.
Step 3: Expect Processing Without Penalties
The CRA has stated that adjustments related to the inclusion rate reversal will be processed without penalties or interest charges attributable to the rate difference. Standard processing times for T1 adjustments are 8 to 12 weeks, though complex estate returns may take longer.
Step 4: Redistribute the Refund
Once the CRA issues a refund for the overpaid tax, the executor must distribute the additional funds to the estate beneficiaries according to the will. If the estate has already been fully distributed, the executor may need to issue supplementary payments.
Limitation period: Taxpayers generally have 10 calendar years from the original assessment date to request a T1 adjustment. For returns filed in 2024 or 2025, there is ample time — but executors should not delay, as beneficiaries are entitled to the correct distribution and interest on refunds accrues only from the original payment date.
How the Inclusion Rate Interacts With Other Estate Planning Strategies
The inclusion rate is only one variable in estate tax planning. Several strategies reduce or eliminate the capital gains tax at death regardless of what rate applies:
Principal Residence Exemption
The principal residence exemption eliminates capital gains tax on the family home entirely. In our example, the $500,000 gain comes from a cottage and stocks — if the deceased had designated the cottage as their principal residence for certain years, a portion of the $300,000 cottage gain could be sheltered. However, only one property per family can be designated per year, so families with both a home and a cottage must choose strategically.
Spousal Rollover
Under subsection 70(6), capital property can roll over to a surviving spouse or common-law partner at the deceased's adjusted cost base — deferring the capital gain entirely until the surviving spouse dies or sells. In our example, if a surviving spouse existed, the $500,000 gain would be deferred. The inclusion rate at the time of the second death then applies — making the rate a moving target for couples who rely on spousal rollovers.
Graduated Rate Estate (GRE)
A graduated rate estate — available for up to 36 months after death — can allocate certain income to the estate rather than the deceased's terminal return, potentially splitting income across two returns and accessing lower marginal rates on each. This does not change the inclusion rate but can reduce the effective tax rate on the included gain.
Charitable Donations
Donations of publicly traded securities to a registered charity are exempt from capital gains tax entirely — the inclusion rate is 0%, not 1/2 or 2/3. For estates with significant stock portfolios, donating appreciated securities through the estate can eliminate the capital gains tax on those assets while generating a donation tax credit that offsets other estate income.
Historical Context: Canada's Inclusion Rate Has Changed Before
The 2024 proposal was not unprecedented. Canada has adjusted the capital gains inclusion rate multiple times:
- Before 1972: Capital gains were not taxed in Canada at all
- 1972 to 1987: 1/2 inclusion rate (50%)
- 1988 to 1989: 2/3 inclusion rate (66.67%)
- 1990 to February 27, 2000: 3/4 inclusion rate (75%)
- February 28 to October 17, 2000: 2/3 inclusion rate (66.67%)
- October 18, 2000 to present: 1/2 inclusion rate (50%)
The current 1/2 rate has been in effect for over 25 years — the longest stable period in Canadian capital gains tax history. But the 2024 proposal demonstrated that any government can propose changes with relatively short notice. Estate plans built around a specific inclusion rate carry inherent legislative risk.
What This Means for Estates With Large Unrealized Gains in 2026
For executors filing terminal returns in 2026, the practical implications are straightforward:
- Apply the 1/2 inclusion rate to all capital gains on the terminal T1 return — the 2/3 rate is not in effect
- Do not assume the 1/2 rate is permanent — future governments may revisit the inclusion rate, and estates that take years to settle could face different rules
- Prioritize rate-independent strategies — principal residence exemptions, spousal rollovers, charitable donations, and lifetime capital gains exemptions protect the estate regardless of the inclusion rate
- Document the cost base meticulously — whether the rate is 1/2 or 2/3, the gain is calculated from the adjusted cost base, and missing records can result in the CRA deeming a zero cost base
Cottages, Investment Properties, and Non-Registered Portfolios: The Assets Most Affected
The inclusion rate matters most for assets that accumulate large unrealized gains over decades. In a typical Ontario estate, these are:
- Family cottages: Purchased 20 to 40 years ago for $100,000 to $200,000, now worth $500,000 to $1,000,000+. Gains of $300,000 to $800,000 are common
- Rental and investment properties: Decades of appreciation plus recaptured CCA create large deemed dispositions. A rental property with a $200,000 ACB and $600,000 FMV triggers a $400,000 gain plus CCA recapture
- Non-registered stock portfolios: Long-held blue-chip stocks and ETFs with low cost bases. A portfolio built over 30 years with $150,000 invested and $400,000 current value has $250,000 in unrealized gains
- Small business shares: Eligible for the Lifetime Capital Gains Exemption ($1,016,836 in 2024), but gains exceeding the LCGE are subject to the inclusion rate
RRSPs, TFSAs, and principal residences are not affected by the inclusion rate — RRSPs are taxed as ordinary income (100% included), TFSAs are tax-free, and the principal residence is exempt from capital gains entirely.
The Bottom Line: The Rate Is 1/2, But Plan for Uncertainty
The 2024 to 2025 capital gains inclusion rate saga ended well for Canadian estates — the 1/2 rate survived, and executors who overpaid can recover the difference. But the episode exposed a real vulnerability in estate plans that depend on a specific tax rate remaining constant.
For an estate with $500,000 in unrealized gains, the difference between the 1/2 and 2/3 rate is approximately $27,650 — meaningful, but not catastrophic. The real lesson is that the inclusion rate can change, has changed before, and will likely be debated again. Estates holding cottages, investment properties, and large non-registered portfolios should build flexibility into their plans.
A financial planner specializing in inheritance planning can model your estate's exposure to inclusion rate changes, identify rate-independent strategies (spousal rollovers, charitable donations, principal residence optimization), and ensure your executor has the documentation needed to file an accurate terminal return — at whatever inclusion rate applies when the time comes.
Key Takeaways
- 1Budget 2024 proposed raising the capital gains inclusion rate from 1/2 to 2/3 effective June 25, 2024, but the measure was never passed into law — the new government elected in 2025 formally abandoned it, and the 1/2 rate remains in effect for 2026
- 2On a $500,000 unrealized capital gain in an Ontario estate, the difference between the 1/2 and 2/3 inclusion rates is approximately $27,650 in additional tax — the estate keeps this money under the current rules
- 3Executors who filed terminal T1 returns applying the 2/3 rate should file a T1-ADJ to request reassessment at the 1/2 rate — the CRA has confirmed no penalties or interest will apply to the rate difference
- 4The deemed disposition at death under subsection 70(5) triggers capital gains tax on all unrealized gains — a $500,000 gain at the 1/2 rate produces approximately $133,825 in combined Ontario federal-provincial tax on the terminal return
- 5Estate planning strategies like spousal rollovers, the principal residence exemption, and alter ego trusts provide protection regardless of future inclusion rate changes — strategies that depend on a specific rate carry legislative risk
Quick Summary
This article covers 5 key points about key takeaways, providing essential insights for informed decision-making.
Frequently Asked Questions
Q:What is the current capital gains inclusion rate in Canada as of 2026?
A:As of 2026, the capital gains inclusion rate in Canada is 1/2 (50%) for all taxpayers, including individuals, trusts, and corporations. The proposed increase to 2/3 (66.67%) that was announced in Budget 2024 and effective June 25, 2024 was never enacted into law. The new government elected in 2025 formally abandoned the measure, and the CRA confirmed it would not apply the higher rate to any gains realized after June 24, 2024. The $250,000 annual threshold that would have applied to individuals under the proposed regime is also not in effect.
Q:How much more tax would a $500,000 capital gain cost under the 2/3 inclusion rate vs the 1/2 rate?
A:On a $500,000 capital gain for an Ontario taxpayer at the top marginal rate: under the 1/2 inclusion rate, the taxable capital gain is $250,000, producing approximately $133,825 in combined federal and provincial tax. Under the proposed 2/3 rate (assuming the full gain exceeded $250,000), the taxable capital gain would have been approximately $333,333, producing approximately $161,475 in tax. The difference is approximately $27,650 — money that stays in the estate under the current 1/2 rate rather than going to the CRA.
Q:Should executors who filed under the 2/3 rate request an amended T1 return?
A:Yes. If an executor filed a terminal T1 return applying the 2/3 inclusion rate for gains realized between June 25, 2024 and the date the measure was formally abandoned, the CRA has indicated that taxpayers may request a reassessment to apply the 1/2 rate instead. Executors should file a T1-ADJ (T1 Adjustment Request) for the relevant tax year. The CRA has committed to processing these adjustments without penalties or interest charges related to the inclusion rate difference. The limitation period for requesting an adjustment is generally 10 years from the original assessment.
Q:Does the capital gains inclusion rate affect the deemed disposition at death?
A:Yes. When a Canadian resident dies, they are deemed to have disposed of all capital property at fair market value immediately before death under subsection 70(5) of the Income Tax Act. The resulting capital gain is included on the deceased's final (terminal) T1 return. The inclusion rate determines what fraction of that gain becomes taxable income. At the 1/2 rate, a $500,000 gain produces $250,000 in taxable income. At the 2/3 rate, the same gain would produce $333,333 in taxable income. For estates with large unrealized gains — cottages, investment properties, non-registered stock portfolios — the inclusion rate directly determines the estate's tax bill.
Q:What was the $250,000 threshold in the proposed capital gains changes?
A:Under Budget 2024, the government proposed that individual taxpayers would continue to pay the 1/2 inclusion rate on the first $250,000 of annual capital gains. Only gains above $250,000 would be subject to the higher 2/3 rate. However, this threshold applied only to individuals — trusts and corporations would have faced the 2/3 rate on the entire gain from the first dollar. For estates (which file as a trust after the year of death, or on the terminal T1 for the year-of-death return), the threshold's application depended on whether the gain was reported on the individual's terminal return ($250,000 threshold available) or a graduated rate estate return (no threshold). This complexity is now moot because the entire proposal was abandoned.
Q:Can the capital gains inclusion rate change again in the future?
A:Yes. The capital gains inclusion rate is set by federal legislation and can be changed by any future government through a budget or economic statement. Canada has changed the rate before: it was 3/4 (75%) from 1990 to 1999, then 2/3 (66.67%) in 2000, then 1/2 (50%) from October 2000 onward. The 2024 proposal demonstrated that governments continue to view the inclusion rate as a policy lever. Estate planners should build flexibility into their strategies — an alter ego trust, spousal rollover, or principal residence exemption provides protection regardless of the inclusion rate, while strategies that depend on a specific rate carry legislative risk.
Question: What is the current capital gains inclusion rate in Canada as of 2026?
Answer: As of 2026, the capital gains inclusion rate in Canada is 1/2 (50%) for all taxpayers, including individuals, trusts, and corporations. The proposed increase to 2/3 (66.67%) that was announced in Budget 2024 and effective June 25, 2024 was never enacted into law. The new government elected in 2025 formally abandoned the measure, and the CRA confirmed it would not apply the higher rate to any gains realized after June 24, 2024. The $250,000 annual threshold that would have applied to individuals under the proposed regime is also not in effect.
Question: How much more tax would a $500,000 capital gain cost under the 2/3 inclusion rate vs the 1/2 rate?
Answer: On a $500,000 capital gain for an Ontario taxpayer at the top marginal rate: under the 1/2 inclusion rate, the taxable capital gain is $250,000, producing approximately $133,825 in combined federal and provincial tax. Under the proposed 2/3 rate (assuming the full gain exceeded $250,000), the taxable capital gain would have been approximately $333,333, producing approximately $161,475 in tax. The difference is approximately $27,650 — money that stays in the estate under the current 1/2 rate rather than going to the CRA.
Question: Should executors who filed under the 2/3 rate request an amended T1 return?
Answer: Yes. If an executor filed a terminal T1 return applying the 2/3 inclusion rate for gains realized between June 25, 2024 and the date the measure was formally abandoned, the CRA has indicated that taxpayers may request a reassessment to apply the 1/2 rate instead. Executors should file a T1-ADJ (T1 Adjustment Request) for the relevant tax year. The CRA has committed to processing these adjustments without penalties or interest charges related to the inclusion rate difference. The limitation period for requesting an adjustment is generally 10 years from the original assessment.
Question: Does the capital gains inclusion rate affect the deemed disposition at death?
Answer: Yes. When a Canadian resident dies, they are deemed to have disposed of all capital property at fair market value immediately before death under subsection 70(5) of the Income Tax Act. The resulting capital gain is included on the deceased's final (terminal) T1 return. The inclusion rate determines what fraction of that gain becomes taxable income. At the 1/2 rate, a $500,000 gain produces $250,000 in taxable income. At the 2/3 rate, the same gain would produce $333,333 in taxable income. For estates with large unrealized gains — cottages, investment properties, non-registered stock portfolios — the inclusion rate directly determines the estate's tax bill.
Question: What was the $250,000 threshold in the proposed capital gains changes?
Answer: Under Budget 2024, the government proposed that individual taxpayers would continue to pay the 1/2 inclusion rate on the first $250,000 of annual capital gains. Only gains above $250,000 would be subject to the higher 2/3 rate. However, this threshold applied only to individuals — trusts and corporations would have faced the 2/3 rate on the entire gain from the first dollar. For estates (which file as a trust after the year of death, or on the terminal T1 for the year-of-death return), the threshold's application depended on whether the gain was reported on the individual's terminal return ($250,000 threshold available) or a graduated rate estate return (no threshold). This complexity is now moot because the entire proposal was abandoned.
Question: Can the capital gains inclusion rate change again in the future?
Answer: Yes. The capital gains inclusion rate is set by federal legislation and can be changed by any future government through a budget or economic statement. Canada has changed the rate before: it was 3/4 (75%) from 1990 to 1999, then 2/3 (66.67%) in 2000, then 1/2 (50%) from October 2000 onward. The 2024 proposal demonstrated that governments continue to view the inclusion rate as a policy lever. Estate planners should build flexibility into their strategies — an alter ego trust, spousal rollover, or principal residence exemption provides protection regardless of the inclusion rate, while strategies that depend on a specific rate carry legislative risk.
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