Capital Gains Inclusion Rate on a Business Sale in Ontario

If you are planning to sell a business, one of the first questions is how much of the gain will be taxed. Headlines about higher inclusion rates over the past two years have left many owners unsure what applies to them.

This article sets out the current inclusion rate, what happened to the proposed increase, how the lifetime capital gains exemption sits on top of it, and why alternative minimum tax can still matter. Because the right figures depend on your year of sale and your facts, treat it as a framework for questions to ask your accountant.

The inclusion rate today

The inclusion rate is the portion of a capital gain that is added to your income. Under s. 38(a), a taxable capital gain is generally one-half of the capital gain. An allowable capital loss is one-half of the capital loss under s. 38(b), and an allowable business investment loss is one-half of the business investment loss under s. 38(c). The consolidated text shows no inclusion-rate increase.

In plain terms, if no exemption applies, the taxable capital gain is generally one-half of the gain on your shares. That amount is then taxed at your personal rates in the year the gain is reported.

What happened to the proposed increase

The government had proposed raising the inclusion rate from one-half to two-thirds, above $250,000 of gains for individuals. That proposal was deferred to January 1, 2026 and then cancelled. The Department of Finance announced the deferral on January 31, 2025, and the cancellation later superseded it.

Budget 2025 confirmed the government would not proceed, and a September 2026 Finance backgrounder lists cancelling the proposed increase among the government's actions. How this applies to your sale depends on your year of sale and your situation, so it is worth confirming with your accountant or a lawyer.

How the lifetime capital gains exemption reduces the gain

If you are selling qualified small business corporation shares, the lifetime capital gains exemption (LCGE) may shelter part or all of the gain. The CRA states the limit as $1,250,000 for dispositions of qualifying property after June 24, 2024, with a maximum capital gains deduction of $625,000, which is 50% of that amount. For dispositions in 2026 the CRA lists $1,275,000, reflecting 2.0% indexation. The Department of Finance has described the increase to $1.275 million for eligible entrepreneurs as one of its actions.

The shares must meet the qualifying tests. At the determination time the share must be a share of a small business corporation owned by you, other than by a trust that is not a personal trust. Throughout the 24 months before, it must not have been owned by anyone other than you or a related person or partnership. Also throughout that period, more than 50% of the fair market value of the corporation's assets must be attributable to assets used principally in an active business carried on primarily in Canada, or to certain shares or debt of connected corporations.

Your available deduction can be smaller than the headline figure. Allowable business investment losses reduce the annual gains limit, and a positive cumulative net investment loss reduces the cumulative gains limit. The deduction is calculated on Form T657 and claimed on line 25400, and Form T936 calculates cumulative net investment loss.

Alternative minimum tax on a large sale

Even with the one-half inclusion rate, a big gain can trigger alternative minimum tax (AMT). The AMT rate is 20.5% applied to adjusted taxable income above the exemption threshold, less a basic minimum tax credit. For AMT purposes, capital gains are included at 100%. The LCGE deductions are counted at 7/5. Combined, that leaves a net AMT inclusion of about 30% of gains sheltered by the exemption, which is arithmetic from the statute rather than a stated figure.

For 2025, the CRA says an individual whose test amount is $177,882 or less probably does not owe minimum tax, and Form T691 may be needed above that. Form T691 is used to calculate federal tax payable under the AMT. AMT paid can be recovered: unused additional tax from the 7 preceding taxation years can be deducted from later tax payable, but only to the extent regular tax exceeds that year's minimum amount. In a one-time sale year, recovery may take time, so ask for AMT to be modelled.

What this means for your price and next steps

A buyer will not usually pay more because your tax is lower, and the rates you face come from your overall income, not just the sale. What you can control is the structure, the timing and the paperwork. The same price can leave you with different after-tax amounts depending on the exemption, the reserve and AMT.

• Confirm your year of sale, because the LCGE limit is indexed from year to year.
• Ask your accountant to test whether your shares meet the 24-month and 50% tests.
• Check for allowable business investment losses and cumulative net investment loss.
• Have AMT modelled for the sale year, including Form T691.
• Ask whether payment over time could spread the gain; see our article on the capital gains reserve.
• Ask a lawyer to align the purchase agreement with the tax plan before you sign.

Frequently asked questions