A couple who bought their Muskoka cottage in 1998 for $185,000 and sell it this fall at $675,000 face the same capital gains treatment Canada has used since 2000. The gain is $490,000, and half of that gain, $245,000, is taxable income under the 50% inclusion rate that remains in force in 2026.

How the split works

The $490,000 gain is included at 50%, producing $245,000 of taxable income. At a 43% marginal rate, the tax on that amount is approximately $105,000.

All capital gains in 2026 are taxed at the 50% inclusion rate that has been standard in Canada since 2000. The proposed increase to 50% above $250,000 for individuals and on all corporate gains was cancelled in March 2025 and never took effect. For individuals, corporations and trusts, the inclusion rate is a uniform 50% with no threshold.

The capital gains inclusion rate has remained 50% throughout 2024, 2025 and 2026. A proposed increase to 66.67% was announced in the 2024 federal budget, deferred to January 1, 2026, then cancelled on March 21, 2025 and never enacted.

What this does to timing decisions

With a flat 50% inclusion rate in 2026, there is no tax advantage to splitting a disposition across two calendar years based on the size of the gain. Timing decisions may still matter for cash flow, marginal rate management, or other tax planning reasons, but the capital gains inclusion rate itself does not create an incentive to split large gains across multiple years.

Alternatively, some families are naming the cottage as their principal residence for the years it appreciated most, if they own more than one property and have flexibility in how they designate. The principal residence exemption shelters all gains on a qualifying property, and the designation can be made retroactively at the time of sale. The calculation is per year of ownership, and you can only designate one property per family unit per year, but for families who spent summers at the cottage and winters in the city, the cottage can sometimes produce the larger tax saving.

The estate scenario

When someone dies owning a cottage, the property is deemed disposed at fair market value on the date of death, triggering a capital gain. For a $600,000 cottage bought for $150,000, the deemed gain is $450,000. At the 50% inclusion rate, $225,000 is taxable income on the terminal return. The principal residence exemption can apply to the estate for the years the deceased owned and ordinarily inhabited the property as their principal residence.

Transferring the cottage to the next generation while the owner is still alive can reduce the tax bill, assuming the current gain is under $250,000 or the family has other ways to manage the tax cost. A gift is still a deemed disposition and still triggers capital gains tax, but at least the tax is paid at the current owner's rate rather than the estate's, and it can be planned.

The capital gains inclusion rate in 2026 remains 50%, exactly as it has been since 2000. A proposed increase to 66.67% above $250,000 was announced in the 2024 federal budget, deferred to January 2026, then cancelled in March 2025 and never enacted. For cottages that have appreciated significantly, half of the gain is taxable income, and planning around the timing, principal residence designation, and marginal rate management remains important.