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When you sell an asset—whether it’s shares in a corporation or certain types of real estate—you may trigger a capital gain if the sale price exceeds what you originally paid. This doesn’t just apply to sales; under Canadian tax law, certain life events like passing away or gifting assets (e.g., to an adult child) are also treated as if you’ve sold them at fair market value. Historically, only 50% of any capital gain was taxable. However, the 2024 federal budget has increased that inclusion rate to two-thirds for gains exceeding $250,000 annually, effective for any property disposed of on or after June 25, 2024.

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Jan 31, 2025 UPDATE: The Government of Canada has announced a deferral in the implementation of the proposed change to the capital gains inclusion rate. Initially set to take effect on June 25, 2024, the new inclusion rate—which would have increased the taxable portion of capital gains from 50% to 66.67% for gains exceeding $250,000—has been postponed to January 1, 2026.

This delay provides additional time for taxpayers, business owners, and advisors to adjust their financial planning strategies. The government has indicated that further details will be shared in the coming months regarding the new implementation timeline.

For the latest updates, you can view the full announcement on the Government of Canada’s website.

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For many Canadians, including private corporation shareholders, this means a higher tax bill. However, there’s good news for those who own shares in qualifying small business corporations, as well as certain farming and fishing properties. The lifetime capital gains exemption has been increased from $1,016,836 to $1,250,000. But, as with many tax rules, the details are complex, and it’s important to consult with your tax advisor to see if your shares qualify.

A Real-Life Example: What This Means in Practice

Consider Christina, a 60-year-old widow who owns preferred shares in her family’s operating company (Opco) with a market value of $10 million and an adjusted cost base (ACB) of zero. Christina plans to leave these shares to her children, who currently own the company’s common shares. Under the new rules, upon Christina’s passing, the entire $10 million gain will need to be reported on her final tax return.

With the new inclusion rate, Christina’s tax bill would be almost 29% higher than under the previous system. This poses a challenge for her estate, which might struggle to find the liquidity needed to cover the tax. Depending on credit conditions, borrowing to pay the tax might not be feasible, and selling company shares could undermine the family’s intention to keep the business running.

The Role of Life Insurance in Estate Planning

This is where life insurance becomes a critical tool. By having Opco own a life insurance policy on Christina’s life, the business can ensure liquidity is available exactly when it’s needed most. While insurance premiums aren’t tax-deductible, corporate ownership often makes sense because businesses generally pay lower taxes than individuals, leaving more after-tax dollars to fund the premiums.

When Christina passes, the insurance proceeds received by the corporation are tax-free. These proceeds can be credited to the capital dividend account and distributed to her heirs as tax-free capital dividends, ensuring the business stays in the family without financial strain.

Next Steps

With these changes to capital gains taxation, it’s more important than ever to work with both your financial advisor and tax professional. Together, we can develop a strategy that protects your wealth, minimizes tax burdens, and ensures a smooth transition for the next generation.

Disclaimer: This information is provided for general informational purposes only. Executive Health Benefits is not engaged in providing legal, accounting, tax, or other professional advice or services. This content should not be considered a substitute for professional consultation with qualified advisors. Executive Health Benefits makes no representations or warranties, express or implied, regarding the accuracy, completeness, or reliability of this information and will not be held liable for any errors, omissions, or delays in its provision.