Certainty Amidst Reform: Navigating the 2025 Federal Budget for Real Estate Investors

The 2025 Federal Budget, delivered on November 4, 2025, by Finance Minister François-Philippe Champagne under Prime Minister Mark Carney’s mandate, offered a significant degree of stability for Canadian real estate investors, avoiding the immediate, dramatic tax hikes that had been rumored in the preceding political cycle.¹ Titled “Canada Strong,” the budget focused on fiscal stability and targeted integrity measures rather than transformational tax policy.³

For the investment community, the most consequential aspect of this budget was the explicit confirmation of the tax status quo on the capital gains inclusion rate, paired with the introduction of new long-term planning timelines for high-net-worth individuals and trusts.⁵

I. Stability Confirmed: The Capital Gains Inclusion Rate

The core of the 2025 tax environment is certainty: the government explicitly cancelled the proposal from the 2024 budget that would have increased the general capital gains inclusion rate from 50% to 66.67% (two-thirds).⁷

Core Rate Maintained

The standard capital gains inclusion rate remains 50% for both individuals and corporate entities for the 2025 taxation year and beyond, pending future legislative changes.⁶ This cancellation removed a major source of market friction and eliminated the immediate pressure on investors to rush asset dispositions before a mid-year 2024 deadline, allowing strategic decisions to be driven by market fundamentals rather than tax mitigation.¹ The government also formally cancelled the proposed Canadian Entrepreneurs' Incentive (CEI), which had been designed to complement the now-scrapped higher inclusion rate.¹

II. The Future Tiered System: Planning for the $250,000 Threshold

While the standard inclusion rate remains stable in the short term, the budget confirmed the introduction of a key structural element for individuals that will define tax planning starting in 2026: the $250,000 annual capital gains threshold.⁸

A. The Individual Advantage (Effective January 1, 2026)

The government confirmed that a new $250,000 annual threshold for net capital gains realized by individuals will come into effect on January 1, 2026.⁸ This threshold is intended to ensure that individuals earning “modest capital gains” continue to benefit from the current one-half (50%) inclusion rate.⁸

This change establishes an implicit tiered tax structure for high-net-worth individuals:

1. Preferential 50% Inclusion: The first $250,000 of net capital gains realized by an individual in a taxation year remains subject to the current 50% inclusion rate.¹⁰

2. Higher Inclusion Rate: Gains realized in the year that exceed the $250,000 threshold will be subject to a higher inclusion rate, which is expected to be the previously proposed 66.67% (two-thirds).¹⁰

This structural divergence mandates that investors managing significant unrealized gains (e.g., from long-held rental properties) must immediately assess the timing of dispositions. Utilizing installment sales or staggering transactions across multiple years becomes a primary tax planning tool to maximize the annual use of the $250,000$ preferential bracket.¹¹

B. Corporate Disparity

In contrast to individual investors, corporations and most standard trusts are explicitly denied access to this annual $250,000$ preferential threshold.¹² This means that the higher inclusion rate (expected to be 66.67%, or two-thirds) will apply to all capital gains realized by corporate holding structures after the effective date, creating a substantial differential cost compared to direct individual ownership.¹⁴

III. Targeted Integrity Measures: Trusts and Corporate Structuring

The budget’s focus on tax fairness and integrity led to significant, immediate legislative changes for sophisticated planning structures, particularly affecting trusts used for intergenerational wealth transfer.

A. Tightening the Trust Anti-Avoidance Rule

Personal trusts holding real estate are subject to the 21-Year Deemed Disposition Rule, which requires trusts to recognize accrued capital gains every 21 years to prevent indefinite tax deferral.¹⁵ A common strategy to avoid this rule was the tax-deferred transfer of trust property to a corporate beneficiary owned by a new trust, effectively attempting to reset the 21-year clock indirectly.¹⁶

Budget 2025 broadens the anti-avoidance rules to explicitly capture these indirect transfers.¹⁸ This legislative change applies immediately to transfers of property that occur on or after November 4, 2025 (Budget Day).¹⁸ This requires the immediate halt and review of any complex reorganization involving trusts and corporate beneficiaries that had been planned or was underway after Budget Day.²⁰

B. Enhanced Lifetime Capital Gains Exemption (LCGE)

The government proceeded with the increase of the Lifetime Capital Gains Exemption (LCGE) limit to $1.25 million, effective retroactively to dispositions occurring after June 24, 2024.²¹

For real estate investors, it is crucial to understand that the LCGE applies only to gains realized from the disposition of Qualified Small Business Corporation (QSBC) shares or qualified farm/fishing properties.¹⁴ It generally does not apply to properties held directly or through corporations that primarily generate passive rental income.²³ Investors must ensure rigorous compliance with QSBC asset tests (e.g., the 90% and 50% tests) and actively manage their Cumulative Net Investment Loss (CNIL) to fully utilize this expanded exemption.²¹

C. CCA Recapture: The Dual Tax Burden

The tax treatment of Capital Cost Allowance (CCA, or depreciation) remains unchanged and presents a dual burden for real estate dispositions. When a property is sold for more than its Undepreciated Capital Cost (UCC), the accumulated CCA previously claimed is “recaptured”.¹⁰ Critically, this recapture is taxed as 100% ordinary income, not as a capital gain.¹⁰ This means the recapture is subject to the investor's full, highest marginal income tax rate, while only the residual true appreciation is taxed at the capital gains inclusion rate (50% or the future tiered rate).²⁴

Conclusion: Strategic Imperatives for 2025 and 2026

The 2025 Federal Budget is defined by stabilization and strategic future planning. The cancellation of the immediate 66.67% tax hike removes an urgent tax crystalization requirement. However, the budget introduced or reinforced critical deadlines that mandate immediate action and forward-looking strategy for investors:

1. Individual Timing Strategy: Investors with large unrealized personal gains must use the entirety of 2025 to optimize dispositions under the universally applied 50% inclusion rate. For 2026 and beyond, proactive planning is required to utilize installment sales and loss offsetting to maximize the annual $250,000$ preferential threshold.²⁵

2. Immediate Trust Compliance: All personal trust structures holding appreciated real estate must immediately cease any planned or active reorganization involving an indirect transfer of property to a new trust structure. The broadened anti-avoidance rule is effective as of November 4, 2025, codifying the government's intent to tax deferred gains within the 21-year limit.¹⁸

3. Corporate Re-evaluation: Given the LCGE's inapplicability to passive real estate and the high corporate tax rate on passive income, investors holding long-term rental appreciation assets in corporate structures should continue to evaluate whether the benefits of corporate ownership (e.g., creditor protection) still outweigh the tax disadvantages, especially the lack of access to the individual annual $250,000$ preferential threshold.¹⁴

This budget provides a window of tax stability but simultaneously sets the stage for a more complex, tiered capital gains tax environment starting in 2026. Informed, deliberate tax planning is no longer optional—it is essential to navigating the new landscape of Canadian real estate investment.