Selling Your Business or Cottage? Why the 50% Capital Gains Rate Still Applies in 2026

Yes, the 50% capital gains inclusion rate is still applicable. The government of Ottawa shelved the plan to increase it to two-thirds as of March 21, 2025. Therefore, if you make money from selling a cottage, rental property or stock of your business, 50% is subject to taxation. However, what you still have a say over is the timing of that gain.

What became of the two-thirds capital gains measure?

Budget 2024 introduced the inclusion rate hike to two-thirds from 50%. The measure was to apply to all gains in the case of corporations and trusts, as well as to gains above $250,000 annually in the case of individuals.

The effective date was changed from June 25, 2024, to January 1, 2026. After that, on March 21, 2025, Prime Minister Carney scrapped the inclusion rate hike. It never received Royal Assent.

One element of the initial package remained. The Lifetime Capital Gains Exemption (LCGE) for small business shares and farm and fishing property was increased to $1.25 million.

The Spring Economic Update, tabled on April 28, 2026, did not alter the inclusion rate. The Federal Budget 2026 is expected on November 5, and no change has been announced before it.

How does the 50% rate apply to your profit?

The capital gain is your selling price, less the cost of purchasing and selling it. One-half of this gain is added to your income for the year, and one-half is called the taxable capital gain.

Consider the following example of a cottage:

Selling Price = $780,000

Cost and improvements = $280,000

Selling Costs (legal, commission)= $40,000

Capital Gain = $460,000

Taxable Capital Gain = $230,000

The $230,000 is added to your income from other sources. If you had $60,000 of other income, your taxable income is $290,000, and some of that is in the top bracket.

Why is the year of sale important?

The combined federal and Ontario provincial rate increases drastically as income increases. These are the marginal rates for 2026 on capital gains in the higher brackets:

The gap becomes larger. A loss of $100,000 that is subject to taxation at 26.76 percent instead of 22.48 percent loses out by approximately $4,280. The large transaction in one year can make you jump through all these hurdles.

Is it possible to avoid paying tax on a cottage?

Yes. The principal residence exemption will allow you to avoid taxes on the gain from the sale of a property for each year when the property was designated as your principal residence.

Only one property may be designated by a family each year. In case you have a house and a cottage, you choose which property will be designated. Usually, the property with the higher gain per year of ownership is better to choose.

You need to declare the sale and designation on your tax return (T2091 and Schedule 3). Otherwise, the entire gain will be taxable.

There is another rule for property investors. The residential property that was sold within one year after the purchase date is considered business income, taxed at 100%, not as a capital gain.

Sell your business: what about the lifetime capital gains exemption?

The LCGE may shelter up to $1.25 million of capital gains from the disposition of shares in a qualifying small business corporation. Inflation indexing is scheduled to be re-introduced starting in 2026.

There are many requirements. The corporation must be a CCPC. For the entire 24-month period ending on the date of sale, the taxpayer and his/her family members must have owned the shares, and at least 50% of the assets must have been used in active business. On the date of sale, the number increases to 90%.

An asset sale will not qualify for the LCGE; therefore, the planning is very important. It can take up to two years to prepare for sale if there is an excess of cash or investments in the corporation.

How do you time your sale to avoid the top bracket?

It must be done before signing the contract. After the agreement is closed, it is too late for most of these tactics.

•  Choose the appropriate tax year. If the closing takes place on January 3 instead of December 28, then it will move the gain to the following tax year. Should you retire, you may choose the timing such that the gain remains within lower brackets as much as possible by selling when you no longer earn employment income.
• Use the reserve technique to spread the gain. You should use it when you receive the amount of money over several years. One-fifth of the gain must be reported in each of the first five years. In the case of farm property, fishing property and shares of small businesses sold to a child, the reserve period may be extended to ten years.
• Compensate for the gain. RRSP contributions reduce taxable income. Capital losses can be claimed for three years in the past or indefinitely in the future against any gain. Be careful about the superficial loss rule, which does not allow a loss if you buy back the same stock within 30 days. Giving stocks directly to charities eliminates the gain on the stocks.
• Consider secondary consequences. A large gain can result in the application of the alternative minimum tax. It can also bring the net income level to the point when OAS benefits will be taxed. Both scenarios are worth considering before accepting an offer.
• Consider the ownership issues. Using a corporation to sell the asset changes the order of tax payments. Gifts of assets to children are considered sales at fair market value. At death, capital assets are deemed sold, except in case of the spouse.

Pension and RRIF income must also be considered by retirees since it will increase the profit made. Our guide on the Retirement and Pension Income Tax Returns shows how to report such income.

For those who are into construction or real estate, a Construction & Real Estate Tax Accountant can help separate capital gains from business income.

What must you do before listing?

             Here are a few things that can help make the process easier:

• Collect all documentation of your purchases, renovations, and any previous principal residence designations.
• Decide on which property, if any, will be designated as the principal residence.
• Consider at least two scenarios: one-year vs. multiple years.
• Speak with your accountant before signing; planning after closing is too late.
• Verify if there are any changes to the above rules in the federal budget coverage.

Beta Taxes is a certified professional accountants corporation in Ontario and an organisation of licensed CPAs throughout Canada. Thinking of selling your property? Contact our team.