Canadian Small Business Tax Changes 2026: CPP2, Capital Gains, and What's New
2026 Is a Big Year for Canadian Small Business Taxes
If you run a small business in Canada, 2026 brought a cluster of tax changes that affect your bottom line, your payroll costs, and your long-term planning. Some are incremental (CPP2 threshold updates). Some are structural (capital gains inclusion rate). All of them require your attention — and your software’s compliance.
This guide covers each change, its practical impact, and what you should do about it.
CPP2: The Second Tier Is Now Real
The second additional Canada Pension Plan contribution (CPP2) was introduced in 2024, but 2026 is the year it truly bites.
How CPP2 works
CPP contributions now have two tiers:
| Tier | Earnings range | Rate (employee) | Rate (employer) | Self-employed |
|---|---|---|---|---|
| CPP1 | $3,500 to ~$71,300 (first ceiling) | 5.95% | 5.95% | 11.9% |
| CPP2 | ~$71,300 to ~$81,200 (second ceiling) | 4% | 4% | 8% |
Ceilings are indexed annually. Check CRA for exact 2026 amounts.
Impact on self-employed Canadians
If you’re self-employed and earning above the first ceiling, you pay both halves of both CPP1 and CPP2. On earnings between $71,300 and $81,200, that’s an additional ~$792/year in CPP2 contributions (8% of ~$9,900).
Combined with CPP1 maximum contributions, self-employed Canadians earning above $81,200 pay approximately $8,400/year in total CPP contributions — up from about $7,000 before CPP2 existed.
Impact on employers
If you have employees earning above the first ceiling, your employer CPP2 costs are roughly $396/employee/year maximum. For a business with 10 employees above the threshold, that’s nearly $4,000 in additional payroll costs.
What to do
- Verify your payroll system calculates both CPP1 and CPP2 with 2026 ceilings
- Budget for the increased employer contribution
- If you’re self-employed, adjust your quarterly tax instalments to account for higher CPP
Capital Gains Inclusion Rate: 50% → 66.67%
After being proposed, deferred, debated, and finally implemented, the higher capital gains inclusion rate is in effect for 2026.
The new rules
| Taxpayer | First $250,000 in gains | Above $250,000 |
|---|---|---|
| Individuals | 50% inclusion | 66.67% inclusion |
| Corporations | 66.67% on all gains | 66.67% on all gains |
| Trusts | 66.67% on all gains | 66.67% on all gains |
Impact on small business owners
Selling your business: If you sell your incorporated small business and realize capital gains above $250,000 (after the Lifetime Capital Gains Exemption), the portion above $250,000 is now taxed at a higher effective rate.
Example: You sell your qualified small business corporation shares for $2 million, with an adjusted cost base of $100,000. Capital gain: $1.9 million. The LCGE covers $1.25 million. Remaining taxable gain: $650,000.
- First $250,000: 50% inclusion = $125,000 taxable
- Remaining $400,000: 66.67% inclusion = $266,680 taxable
- Total taxable: $391,680
Under the old rules, the total taxable would have been $325,000 (50% of $650,000). The change costs roughly $20,000-$30,000 more in tax depending on your marginal rate.
Real estate investors: Property sales above the $250,000 threshold face the same higher inclusion. If you hold investment properties in a corporation, the 66.67% rate applies from the first dollar of gain.
Stock options: Employee stock options above $250,000 in annual gains are also subject to the higher rate.
The Lifetime Capital Gains Exemption (LCGE)
The silver lining: the LCGE for qualified small business corporation shares was increased to $1.25 million (indexed to inflation). This means the first $1.25 million in capital gains from selling your qualifying small business shares is tax-free.
To qualify, the corporation must:
- Be a Canadian-Controlled Private Corporation (CCPC)
- Use at least 90% of assets in active business in Canada at time of sale
- Have been held for at least 24 months
- Meet the 50% asset test throughout the holding period
Canadian Entrepreneurs’ Incentive (new)
A new incentive reduces the inclusion rate to 33.33% (one-third) on up to $2 million in lifetime capital gains from qualifying small business dispositions, phased in over several years ($400,000 in 2025, increasing to $2 million by 2029).
This effectively creates a second layer of relief on top of the LCGE for qualifying entrepreneurs.
What to do
- If you’re planning to sell your business, consult your tax advisor about timing and structure
- Verify your CCPC status is intact — losing it costs you the LCGE
- If you hold investment properties corporately, model the impact of the 66.67% rate on your exit strategy
- Your ERP should track capital property dispositions and compute the correct inclusion rate
Carbon Tax: Continued Increases
The federal carbon price increased to $95/tonne in April 2026 (up from $80 in 2025). This translates directly to higher fuel and heating costs:
| Fuel | Approximate carbon charge per litre (2026) |
|---|---|
| Gasoline | ~$0.21/L |
| Diesel | ~$0.25/L |
| Natural gas | ~$0.18/m³ |
| Propane | ~$0.15/L |
Impact on small businesses
- Delivery/transportation businesses: Fuel costs are a significant percentage of operating expenses. Track fuel expenses separately in your chart of accounts for accurate analysis
- Retail/hospitality: Heating costs continue to rise. Budget accordingly
- Manufacturing: Energy-intensive operations feel this the most
- Carbon rebate: The Canada Carbon Rebate for small businesses provides some offset. Ensure you’re claiming it
What to do
- Create a dedicated expense category for carbon-related costs in your ERP
- Track fuel consumption for potential rebate claims
- Factor carbon cost increases into your pricing model
Other Changes Worth Noting
EI premium increases
Employment Insurance premiums for 2026:
- Employee rate: ~$1.66 per $100 of insurable earnings (indexed)
- Employer rate: 1.4x the employee rate
- Maximum insurable earnings: ~$65,700 (indexed)
Small employers: the EI premium reduction for businesses with total EI premiums under $60,000 remains available.
Underused Housing Tax (UHT)
If your corporation or trust owns residential property in Canada, you may be subject to the 1% annual Underused Housing Tax unless an exemption applies. Filing is required even if exempt. Deadline: April 30, 2026 for the 2025 tax year.
International tax reporting
Enhanced reporting requirements for international transactions:
- T1135 (Foreign Income Verification): Required if you hold foreign property with a cost >$100,000 CAD
- Country-by-country reporting: For larger corporate groups
- Transfer pricing documentation: Required if you have cross-border related-party transactions
GST/HST updates
No rate changes for 2026, but CRA continues to increase scrutiny of Input Tax Credit claims. Ensure your ITCs are supported by proper documentation (invoices with GST/HST registration numbers).
Your 2026 Tax Calendar
| Date | Obligation |
|---|---|
| Mar 1 | T4, T5, T4A filing deadline (2025 tax year) |
| Mar 15 | Corporate tax instalment (if applicable) |
| Apr 30 | Personal income tax return deadline (T1) |
| Apr 30 | UHT filing deadline |
| Jun 15 | Personal tax deadline for self-employed (but tax owing is still due Apr 30) |
| Jun 15 | Corporate tax instalment |
| Quarterly | GST/HST return (if quarterly filer) |
| Monthly | Payroll remittances (15th of following month, or accelerated if required) |
| 6 months after year-end | Corporate tax return (T2) deadline |
What Your ERP Should Calculate Automatically
For 2026, your accounting software or ERP should handle these without manual intervention:
- CPP1 + CPP2 with correct ceilings and rates
- EI premiums with 2026 rates and maximum insurable earnings
- Federal + provincial income tax withholding with 2026 tables
- GST/HST/PST/QST at correct provincial rates
- Capital gains at the correct inclusion rate (50% first $250K, 66.67% above)
- T4/T4A/T5 generation for year-end filing
- Quarterly instalment calculations for corporate tax and GST/HST
- Payroll remittance scheduling based on your remitter type
- Carbon charge tracking as a separate expense category
If your current software doesn’t handle CPP2 correctly or still uses 2024 withholding tables, it’s time to switch.
Conclusion
2026 is a pivotal year for Canadian small business taxes. CPP2 increases your payroll costs. The capital gains inclusion rate changes your exit planning. Carbon charges keep rising. And the CRA is digitizing every interaction.
None of these changes are individually devastating, but together they increase the complexity of running a Canadian small business. An ERP that automates the calculations, tracks the deadlines, and handles the filings gives you back the hours you’d otherwise spend on compliance.
See how Odiverse handles Canadian taxes or join the waitlist. For deeper dives, read our GST/HST guide for Canadian small businesses, payroll guide (CPP, EI, T4), and how to choose accounting software for your Canadian business.