Small Business Owners in Canada: Big Tax Changes for 2025 (LCGE, 66.67% Cap Gains)

Big tax updates in 2025 are reshaping how business owners can plan and invest in Canada. If you’re looking to minimize taxes, protect your cash flow, and keep more to invest in your business, this article is for you. I’ll go over five key changes that will impact your business, starting with.

1. Capital Gains Tax for Business Owners

2025 is Canada’s first full year to have the new capital gains tax structure for corporations, increasing the inclusion rate from 50% to 66.67%. This means that a larger portion of a corporation’s capital gains is now subject to taxation, impacting after-tax profits, investment decisions, and financial planning.

How It Works: 

ABC Corp, a Canadian corporation, owns an investment property that has appreciated significantly in value. In 2025, the company decides to sell this property for a capital gain of $200,000. Here’s how the tax implications compare:

  • Old Rules (50% Inclusion Rate):
    Under the old rules, 50% of the capital gain ($200,000 × 50% = $100,000) would have been included in taxable income. At a corporate tax rate of 10%, the total tax owed would be $10,000 ($100,000 × 10%).
  • 2025 Rules (66.67% Inclusion Rate):
    In 2025, 66.67% of the capital gain ($200,000 × 66.67% = $133,340) is included in taxable income. At the same 10% corporate tax rate, the tax owed increases to $13,334 ($133,340 × 10%).
  • Impact:
    The additional $33,340 included in taxable income results in an extra tax liability of $3,334 compared to the previous rules.

This 33% increase in taxable capital gains significantly raises tax liabilities, potentially affecting cash flow and net profits. For businesses that rely on capital gains, such as those investing in real estate, securities, or other assets, this shift represents a notable financial challenge. 

Note that these changes do not affect sole proprietors and self-employed individuals, they will still be taxed at the regular 50% inclusion rate. 

Planning strategies 

The increase in the corporate capital gains inclusion rate to 66.7% requires businesses to adopt more thoughtful strategies to manage their assets and investments effectively. Here are two key strategies we’ve been focusing on with our clients a lot with:

1. Reassessing Investment Portfolios
If your business invests in high-growth assets that create big capital gains, you might end up paying more tax under the new rules. A simpler option could be switching to Canadian stocks that pay dividends. Why? Dividends often come with tax perks, like getting some of that tax back when you pay out dividends, making them a smarter choice for keeping more of your profits.

Your business earns $50,000 from high-growth stocks—$33,350 is taxable under the new rules, costing $3,335 at a 10% tax rate. Switching to dividend-paying Canadian stocks instead could recover more tax through a mechanism called refundable dividend tax on hand (RDTOH), 

2. Contributing to an Individual Pension Plan (IPP)
For business owners, IPPs offer a tax-efficient retirement planning tool. Contributions are tax-deductible from corporate income, which can help offset taxable gains. This strategy not only reduces immediate tax liabilities but also builds a solid retirement fund. It’s kind of like an RRSP for your corporation but with even more flexibility and higher limits. 

These strategies require careful planning. If you want to learn more about these strategies, check out our business services page on our website to see how we can help. 

2. CPP 2025 Enhancement and Contribution Updates

The CPP 2025 enhancements bring significant changes for business owners, with increased contribution thresholds that will impact payroll costs and cash flow. These updates maintain two levels of contributions: Regular CPP up to the YMPE, and CPP2 up to the YAMPE.

For 2025, the YMPE has increased to $71,300, up from $68,500 in 2024, meaning Regular CPP contributions now cover a slightly higher portion of income. Similarly, the YAMPE, which determines the range for CPP2 contributions, has risen to $81,200, up from $73,200 in 2024. 

Here’s how the updated contributions work in 2025:

  • Regular CPP: Contributions are calculated at a rate of 5.95% on income up to $71,300 for employees, matched by employers. Self-employed individuals pay both portions for a total of 11.9%.
  • CPP2: Contributions apply to income between $71,300 and $81,200 at a rate of 4% for employees, also matched by employers. Self-employed individuals pay 8%.

Example Contributions for 2025

IncomeRegular CPP ContributionCPP2 ContributionTotal CPP Contribution
$40,000$2,171.75$0.00$2,171.75
$60,000$3,361.75$0.00$3,361.75
$71,300$4,033.10$0.00$4,033.10
$80,000$4,033.10$276.00$4,309.10
$81,200$4,033.10$396.00$4,429.10

Self-employed individuals contribute both the employee and employer portions, doubling the amounts shown here. For example, a self-employed person earning $81,200 in 2025 will contribute $8,860.20.

These changes are all about improving retirement security, gradually increasing the income replacement rate from 25% to 33.33% over 40 years. While that’s good news for your future, the higher contribution rates mean extra costs for employers and self-employed individuals today. If you have multiple employees, these increases could have a noticeable impact on payroll expenses and cash flow.

That’s why having a solid financial plan is so important. Small businesses might need to adjust their budgets to account for higher payroll costs or explore smarter, tax-efficient ways to compensate employees and reduce the financial strain.

If you’re looking for more insights on how these CPP changes could affect your business, check out my other video, where I dive deeper into the details!

3. Lifetime Capital Gains Exemption (LCGE)

Lifetime Capital Gains Exemption (LCGE)
The Lifetime Capital Gains Exemption (LCGE) allows individuals to shield a portion of capital gains from taxation when selling qualified small business corporation shares. For 2025, the LCGE limit has increased to $1.25 million, up from $1,016,836 in 2024, providing even greater tax-saving opportunities for business owners.

Example: If you sell a qualified small business for $1,250,000, you could potentially exempt the entire capital gain from tax, depending on your remaining LCGE limit.

Pro Tip: The LCGE is available to each individual shareholder. This means that if multiple shareholders sell their shares, each can claim the exemption on their portion of the gains. This strategy can significantly reduce the overall tax burden, and we’ve successfully helped many clients leverage it for optimal tax efficiency.

Source: TaxTips.ca

4. Canadian Entrepreneurs Incentive (CEI)

The Canadian Entrepreneurs Incentive (CEI) provides tax relief for business owners by reducing the capital gains inclusion rate to 33.3% on a lifetime maximum of $2 million in eligible capital gains. This incentive is being phased in gradually, with the limit increasing by $400,000 annually, reaching the full $2 million cap by 2029.

Example: A small business owner with a $100,000 taxable capital gain would include only $33,300 in taxable income under the CEI, compared to $66,700 without it. This can lead to significant tax savings.

Why It’s Not Always Helpful: While the CEI reduces the inclusion rate, it doesn’t address investment income taxation, which remains subject to regular corporate tax rates. For many business owners, the Lifetime Capital Gains Exemption (LCGE) remains a more effective tool. The LCGE offers a complete exemption for eligible capital gains, which can often provide greater overall savings, especially when multiple shareholders are involved, as mentioned earlier. By strategically allocating gains across shareholders, you can maximize the benefits of the LCGE and reduce tax liabilities without relying solely on the CEI.

This is a nuanced area of tax planning, and combining strategies like the CEI and LCGE can be powerful if implemented correctly.

5. Electronic Filing Requirements

Starting in 2025, new CRA rules require businesses filing six or more information returns, such as T4s or T5s, to file electronically. Corporations with over $1 million in revenue must also submit T2 returns online. While this may not impact most established businesses already filing electronically, smaller businesses or those still using manual methods will need to adjust.

The CRA offers digital tools to simplify compliance. My Business Account allows businesses to manage GST/HST, payroll, and corporate tax. Smaller returns (up to 100 slips) can use Web Forms. Sign up for a My Business Account today if you don’t already have one. 

BONUS TIP: Credit Card Transaction Fee Reductions

This isn’t about taxes, but it’s great news for business owners: Starting October 19, 2024, Canadian small businesses will see credit card transaction fees drop by up to 27% under new agreements with Visa and Mastercard. This initiative, expected to save eligible businesses around $1 billion over five years, significantly reduces operational costs tied to credit card payments.

More than 90% of credit card-accepting businesses will qualify for reduced fees. In-store transaction rates will drop to an annual average of 0.95%, while online transactions will see up to a 7% reduction. 

To qualify, businesses must meet annual sales thresholds: under $300,000 for Visa and under $175,000 for Mastercard. 

Running your business while staying on top of tax changes can be overwhelming, but you don’t have to do it alone. At Blueprint Financial, we specialize in helping business owners like you simplify the process, minimize taxes, and maximize growth. Book a consultation today, and don’t forget to like and subscribe for more expert tips for your business success.

Photo of author

AUTHOR

Christopher Liew, CFA, CFP®

As the founder of Blueprint Financial, Christopher leads a team dedicated to creating custom plans that fit your unique goals. Together, they work to help you secure your financial future and enjoy the lifestyle that you’ve worked so hard for.
Our services

What we do

Here's how we can help you:

Financial Planning

We’ll craft a custom plan to help you save, reduce taxes, retire, and protect your future—all in one clear Blueprint.

Business Services

Tailored strategies for taxes, retirement, and wealth management so you can focus on growing your business.

Investment strategy

We align your financial plan with professional investment management to keep you on track.