What Canada’s Tax Changes Might Mean for the Art Market
A Financial Focus Friday post on the deferral of changes to the capital gains inclusion rate.
This February 14 post on the changing landscape of capital gains tax in Canada is in honour of V-day (I’ll let you decide if I mean Valentines of Valuation).
At the end of January 2025, the Canadian government announced a deferral of the implementation of changes to the capital gains inclusion rate. The initial announcement of the change came in June 2024 as part of the Liberal government’s “fairness for every generation” initiative.
The inclusion rate is the portion of capital gains that is taxable. In 2024 the Canadian government proposed increasing the capital gains inclusion rate from 1/2 to 2/3 for individuals on gains exceeding $250,000 annually. This means the new 2/3 inclusion rate will only apply to gains exceeding this threshold. Since capital gains came into effect on January 1, 1972—known as Valuation day—the inclusion rate has shifted several times depending on the government and the needs of the economy.
Let’s look at two hypotheticals to see this incoming 2026 change in action:
Example 1: You bought an artwork for $20,000 in 1990 and sell it for $40,000 in 2026.
The capital gain is $40,000 minus $20,000, so $20,000. Since this is below the $250,000 threshold, the inclusion rate remains 1/2. The taxable capital gain is 1/2 of $20,000, so $10,000. This amount is then added to the seller’s taxable income for the year.
Example 2: You bought an artwork for $20,000 in 1990 and sell it for $500,000 in 2026 (good for you!).
The capital gain is $500,000 minus $20,000, so $480,000. The first $250,000 of the gain is taxed at the 1/2 inclusion rate, so 1/2 of $250,000 is $125,000. The remaining 230,000 of the gain is taxed at the 2/3 inclusion rate, so 2/3 of $230,000 is $153,333.
The total taxable capital gain that is added to the seller’s taxable income for the year is $125,000 plus $153,333, so $278,333.
Artworks are considered capital property in Canada. When you sell a piece of art for more than you paid, the resulting profit is a capital gain and is taxable. However, the application of capital gains tax varies in specific situations such as donations to qualified donees such as public galleries or museums, donations of certified cultural property, and estate dispositions—it’s always best to talk to your lawyers and accountants.
The impending increase in the capital gains inclusion rate, now scheduled for 2026, has several potential implications for the Canadian art market. This interim window between now and then gives collectors, investors, and collections time to plan and adjust their acquisition strategies.
For example, collectors might expedite the sale of high-value artworks before the tax hike to benefit from the current lower inclusion rate leading to a temporary surge in art transactions as 2026 approaches.
Donation could also become more attractive. By donating prior to the 2026 hike, donors can lock in the current inclusion rate, potentially reducing the tax burden associated with capital gains on appreciated artworks. (But good luck finding a collection to accept it!)
In terms of estate planning, individuals with significant art collections may revisit their estate plans transferring ownership through trusts or making inter vivos (during life) gifts to heirs before the tax increase takes effect, to minimize future tax liabilities.
The key takeaway: Selling high-value artworks post-2026 will result in higher taxable income. In terms of what we’ll see in the art market—who knows! Maybe the Canadian art market will get a little boost this year as the global art market slowly recovers from its post-pandemic low.