Is Canada's Capital Gains Inclusion Rate 50% or 66.67% in 2026?
The Definitive Answer: Canada's Capital Gains Inclusion Rate in 2026
As we navigate the tax landscape in June 2026, one of the most frequent questions we receive at Zenith Financial Advisors from US citizens living in Canada, as well as Canadians with US financial ties, is a simple one: Is Canada's capital gains inclusion rate 50% or 66.67%?
Because of a chaotic two-year legislative rollercoaster, online search results are littered with outdated information, contradictory articles, and widespread panic. Let us set the record straight definitively: The Canadian capital gains inclusion rate for 2026 is 50%. The highly controversial proposal to increase the inclusion rate to 66.67% was completely cancelled by the Canadian government. It did not—and will not—take effect.
If you are a US expat, a dual citizen, or a cross-border investor, your Canadian capital gains will continue to be taxed based on the historical 50% inclusion rate. This means that only half of your realized capital gain is added to your taxable income in Canada and taxed at your marginal rate. However, for US persons, the Canadian tax treatment is only half the battle. The United States Internal Revenue Service (IRS) taxes capital gains entirely differently, creating a complex web of cross-border mismatches that require careful planning.
The Rollercoaster Timeline: Why Is There So Much Confusion?
To understand why the internet is flooded with articles claiming the rate is 66.67%, we have to look back at the legislative chaos of 2024 and 2025. The confusion stems from a series of high-profile government announcements that were eventually walked back.
April 16, 2024 (The Original Proposal): In the 2024 Federal Budget, the Canadian government announced a massive shift in tax policy. They proposed increasing the capital gains inclusion rate from 50% to 66.67%. For individuals, this higher rate was slated to apply to capital gains exceeding $250,000 in a single year. For corporations and trusts, the 66.67% inclusion rate was proposed to apply to all capital gains from the very first dollar. The effective date was set for June 25, 2024.
June 25, 2024 (The Phantom Implementation): The government tabled a Notice of Ways and Means Motion to implement the changes. Taxpayers and cross-border planners scrambled. Many individuals triggered capital gains prior to June 25 to lock in the 50% rate, resulting in massive, premature tax bills. However, the actual legislation to cement this change faced intense political and economic pushback from business groups, medical professionals, and foreign investors.
January 31, 2025 (The Deferral): Facing mounting pressure and a stalling economy, the Department of Finance announced a sudden deferral. They stated that the 66.67% inclusion rate would be paused and pushed back to take effect on January 1, 2026. This left taxpayers in a state of limbo, unsure of how to plan for the upcoming year.
March 21, 2025 (The Cancellation): Finally, the government bowed to overwhelming opposition and officially cancelled the proposed inclusion rate increase entirely. The legislation was scrapped. As a result, the 50% inclusion rate remained the law of the land, retroactively nullifying the panic of the previous 11 months.
Because search engines often index and highly rank older news articles from major publications published in mid-2024, many taxpayers searching in 2026 are still reading outdated information. Rest assured, as Enrolled Agents specializing in cross-border tax, we can confirm the rate is 50%.
What Actually Survived? The LCGE and the CEI
While the 66.67% inclusion rate was scrapped, not everything from the 2024 and 2025 budgets was thrown out. Two highly beneficial provisions for Canadian taxpayers did survive and are fully active in 2026. However, as we will explore, these Canadian benefits can become tax traps for US citizens.
1. The Lifetime Capital Gains Exemption (LCGE) Increase
The government successfully increased the Lifetime Capital Gains Exemption (LCGE) to $1.25 million, effective June 25, 2024. This exemption applies to the sale of Qualified Small Business Corporation (QSBC) shares, as well as qualified farm and fishing property. It remains indexed to inflation for the 2026 tax year and beyond. This allows Canadian resident business owners to sell their companies and shelter over a million dollars of capital gains from Canadian taxation.
2. The Canadian Entrepreneurs' Incentive (CEI)
Also surviving the legislative chopping block was the Canadian Entrepreneurs' Incentive (CEI). This incentive reduces the capital gains inclusion rate to 33.33% on the disposition of qualifying shares by eligible founding investors. The CEI began its phase-in period in the 2025 tax year and continues to phase up its lifetime limit in 2026. This is a massive boon for Canadian startup founders.
The Cross-Border Catch: If you are a US citizen, green card holder, or US tax resident living in Canada, the IRS does not recognize the Canadian LCGE or the CEI. The US taxes your worldwide income. If you sell a Canadian business and use the LCGE to pay zero tax in Canada, the IRS will step in and tax the entire gain at US long-term capital gains rates. Because you paid no Canadian tax on the transaction, you will have no Foreign Tax Credits to offset the US liability. We highly recommend you book a consultation with our cross-border team before selling any business assets.
The Core Mismatch: Canada vs. US Capital Gains Taxation
To master cross-border taxes in 2026, you must understand that Canada and the United States speak two entirely different tax languages when it comes to capital gains. The fundamental mismatch between the two systems is the root cause of double taxation risks and compliance headaches.
The Canadian System (The Inclusion Rate)
As established, Canada uses an "inclusion rate" system. Currently, the inclusion rate is 50%. This means that if you buy a stock for $10,000 and sell it for $30,000, you have a $20,000 capital gain. In Canada, you "include" 50% of that gain ($10,000) in your taxable income for the year. That $10,000 is then taxed at your standard marginal income tax rate, which can exceed 53% depending on your province of residence. There is no distinction between short-term and long-term capital gains in Canada; a gain is a gain, regardless of how long you held the asset.
The US System (The Absolute Rate)
The United States does not use an inclusion rate. The IRS taxes 100% of the capital gain. However, the US differentiates heavily based on holding period. If you hold an asset for one year or less, it is a short-term capital gain, taxed at ordinary income rates (up to 37%). If you hold the asset for more than one year, it is a long-term capital gain, taxed at preferential rates of 0%, 15%, or 20%, depending on your overall income.
Furthermore, high-income US taxpayers are subject to the Net Investment Income Tax (NIIT), an additional 3.8% surtax on investment income, including capital gains, under IRC Section 1411.
Summary Comparison Table
| Feature | Canada (CRA) | United States (IRS) |
|---|---|---|
| Inclusion Rate | 50% (Confirmed for 2026) | N/A (100% of gain is taxable) |
| Tax Rates | Taxed at marginal income rates on the included 50% | Short-Term: Ordinary Income Rates Long-Term: 0%, 15%, or 20% |
| Holding Period | No distinction between short-term and long-term | Strict 1-year threshold for long-term rates |
| Additional Surtax | None specifically for capital gains | 3.8% Net Investment Income Tax (NIIT) for higher earners |
| Principal Residence | Unlimited Exemption (PRE) | Capped: $250,000 (Single) / $500,000 (Married) |
| Small Business Sale | $1.25M Lifetime Exemption (LCGE) | Section 1202 exists, but rules differ completely |
Navigating the Mismatch: The Foreign Tax Credit (Form 1116)
Because US citizens living in Canada are subject to taxation by both the CRA and the IRS on the exact same capital gains, they must rely on the US-Canada Income Tax Treaty to avoid double taxation. The primary mechanism for this is the Foreign Tax Credit (FTC), claimed on IRS Form 1116.
When you sell a stock or mutual fund at a profit, you will pay Canadian tax on 50% of the gain. When you file your US tax return, you report 100% of the gain. You then use Form 1116 to claim a credit for the taxes you paid to Canada against your US tax liability. Because Canadian tax rates are generally higher than US long-term capital gains rates, the Canadian tax paid is usually sufficient to wipe out the US federal income tax on that specific gain.
However, there are three massive caveats that catch US expats off guard in 2026:
- The NIIT Trap: The 3.8% Net Investment Income Tax cannot be offset by Foreign Tax Credits. Even if you have excess Canadian tax credits, if your income exceeds the statutory thresholds ($200,000 single / $250,000 married filing jointly—which remain unindexed for inflation in 2026), you will owe the 3.8% NIIT to the IRS out of pocket.
- Treaty Resourcing: Under US domestic law, capital gains on the sale of personal property (like stocks) are sourced to the residence of the seller. If you are a US citizen living in Canada, the IRS considers those gains US-source. You cannot claim a foreign tax credit against US-source income. To fix this, you must make a special treaty election under Article XXIV of the US-Canada Tax Treaty to "re-source" the gain as Canadian. This requires filing Form 8833.
- Capital Loss Carryforwards: Canada and the US have different rules for applying capital losses, which can throw off your foreign tax credit math in future years.
For a deep dive into the mechanics of claiming these credits, read our comprehensive Foreign Tax Credit Guide for Form 1116 in 2026.
The Principal Residence Trap (IRC Section 121)
Perhaps the most dangerous cross-border tax trap resulting from the capital gains mismatch involves the sale of your home. If you own a home in Toronto, Vancouver, or anywhere in Canada, and it is your primary residence, the Canadian tax treatment is incredibly generous. Thanks to the Principal Residence Exemption (PRE), you pay absolutely zero capital gains tax in Canada when you sell your home, regardless of how much it appreciated.
The IRS is not so generous. Under Internal Revenue Code (IRC) Section 121, US taxpayers are only allowed to exclude $250,000 of capital gain on the sale of a primary residence if they are single, or $500,000 if they are married filing jointly. Any gain above those thresholds is fully taxable in the United States at long-term capital gains rates (plus the 3.8% NIIT).
Let’s look at a very common 2026 scenario. A married US citizen couple bought a house in Toronto in 2010 for $600,000 CAD. In 2026, they sell it for $2,600,000 CAD. They have a $2,000,000 CAD capital gain.
In Canada, the tax bill is $0 due to the unlimited PRE. In the United States, they must convert the purchase and sale prices to USD using historical exchange rates (which adds another layer of phantom currency gain/loss complexity). Assuming a $1.5 million USD gain, they can exclude $500,000 under Section 121. This leaves $1,000,000 USD of taxable capital gain. Because they paid $0 in Canadian tax, they have zero Foreign Tax Credits to apply. They will owe the IRS 20% in long-term capital gains tax plus 3.8% in NIIT—resulting in a US tax bill of nearly $238,000 USD on a "tax-free" Canadian home sale.
Proactive planning is essential. If you are a US citizen planning to sell highly appreciated Canadian real estate, you must review our pricing and service tiers to engage a cross-border professional well before listing the property.
Cross-Border Estate, Trust, and Corporate Considerations
When the Canadian government cancelled the 66.67% inclusion rate in March 2025, a massive sigh of relief was heard from Canadian corporations and trusts. The original proposal would have subjected all corporate and trust capital gains to the higher inclusion rate from the first dollar, severely damaging corporate investment and estate planning.
For US citizens who own Canadian corporations (often classified as Controlled Foreign Corporations or CFCs), the retention of the 50% inclusion rate is excellent news. However, US expats must still contend with the punitive US GILTI (Global Intangible Low-Taxed Income) and Subpart F regimes. Even if a Canadian corporation pays tax at the 50% inclusion rate, the passive nature of capital gains will likely trigger Subpart F income, flowing the gain through to the US owner's personal US tax return immediately, regardless of whether a dividend was paid.
Similarly, cross-border estate planning remains a minefield. Canada taxes capital gains at death through a "deemed disposition" rule, where the deceased is assumed to have sold all their assets at fair market value immediately prior to death. The US, on the other hand, imposes an Estate Tax based on the total gross value of the estate, while providing a step-up in basis for capital gains. Mismatches in the timing of these taxes can result in double taxation if not structured with highly specialized cross-border trusts. For more details on protecting your legacy, review our guide on US Estate Tax for Canadians in 2026.
Conclusion and Next Steps for 2026
To reiterate our definitive answer: Canada's capital gains inclusion rate is 50% in 2026. The 66.67% proposal is dead. However, the absence of a Canadian tax hike does not mean US citizens living in Canada are in the clear. The fundamental mismatch between Canada's 50% inclusion rate and the US's 100% taxation at varying rates requires meticulous planning, precise treaty elections, and expert preparation of Form 1116.
Whether you are selling a Canadian primary residence, disposing of a business, or simply rebalancing a taxable brokerage account, the cross-border tax implications can be severe. Do not leave your wealth to chance or rely on outdated 2024 news articles. Our team of Enrolled Agents at Zenith Financial Advisors specializes exclusively in US-Canada tax optimization.
Ready to secure your cross-border wealth? Book a consultation with our senior tax strategists today, and ensure your 2026 tax strategy is bulletproof.
We Handle Exactly This — Free 15-Minute Strategy Call
Talk to a licensed Enrolled Agent who specializes in US-Canada cross-border tax. No obligation, no sales pitch — just answers to your specific situation.
