Capital Gains Inclusion Rate Changes Deferred to 2026

WHAT'S IN THIS ARTICLE
Current Status | Introduction | Timeline | Announcements

Published January 31, 2025

If you're a small business owner in Canada, you may have been tracking the ongoing saga of the proposed capital gains inclusion rate changes with a mix of concern and confusion. And who could blame you? Since the initial announcement in June 2024, we've seen more plot twists than a Netflix series - from parliamentary filibusters to prorogation, and finally a deferral to 2026.

To help you keep track of this constantly evolving story, I've organized this post as a chronological series of key announcements and updates similar to how I tracked the transition to HST in 2010. This is my timeline of 'what happened when' and, more importantly, what it means for your business.

Timeline Graphic

Apr 2024: Federal Budget announcement
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Jun 2024: Draft legislation (NWMM) tabled and passed
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Aug 2024: Updated legislative proposal released
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Sep 2024: Second draft legislation (NWMM) tabled (not voted)
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Nov 2024: CRA guidance issued - tax hike will be administered per first ways and means motion
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early Jan 2025: Parliament prorogued; all unfinished business dies
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early-Jan 2025: CRA publish statement - maintains their stance; new forms coming end of Jan 2025; interest and penalty relief provided until Mar 3, 2025
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mid-Jan 2025: Opposition promises to eliminate the increase if elected
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mid-Jan 2025: Liberal leadership candidate also vows to scrap the tax hike if elected
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late-Jan 2025: C.D. Howe Institute calls for deferral/abandonment
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late-Jan 2025: CRA facing two lawsuits
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late-Jan 2025: Implementation deferred (Finally!)
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Jan 2025: LCGE increase still set to take effect Jun 2024 (not enacted yet)
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late-Jan 2025: New CRA guidance issued - CG to be administered at current enacted rate of 50%
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Jan 2025: New Canadian Entrepreneurs' Incentive takes effect (not yet enacted)
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Jan 2026: New inclusion rate begins?

Tracing History - Recap of Announcements

Let's start with the latest development and work our way back through this rollercoaster ride of policy changes..."

January 31, 2025
Capital Gains Exclusion Rate Change Deferred to 2026

The Canadian government announced today that they will be delaying the implementation of changes to the capital gains inclusion rate. Finance Minister Dominic LeBlanc is moving the effective date from June 25, 2024, to January 1, 2026.

The change will increase the inclusion rate from one-half to two-thirds on capital gains above $250,000 for individuals and all capital gains for corporations and trusts.

The government is maintaining several exemptions and introducing new measures, including:

(1) keeping the Principal Residence Exemption;

(2) creating a new $250,000 Annual Threshold effective January 2026;

(3) increasing the Lifetime Capital Gains Exemption to $1.25 million effective June 25, 2024; and

(4) introducing a new Canadian Entrepreneurs' Incentive that reduces the inclusion rate to one-third on eligible capital gains up to $2 million, effective for the 2025 tax year.

Continue reading "Changes to Capital Gains Exclusion Deferred to 2026"

January 06, 2025
What Prorogation of Parliament Means For The Capital Gains Legislation

Today, Parliament was prorogued. This means all legislation before parliament dies until the next session begins.

While the current government remains in power during the prorogation period, this effectively kills the proposed increase of the capital gains tax rate from 50% to 66.67% that was to be effective as of June 25, 2024.

Updated January 10, 2025

What to do when preparing your 2024 tax return?

Do you assume the proposed legislation is killed permanently and apply 50% to capital gains or do you assume it will ultimately pass and apply the 66.67% where applicable?

"The CRA will be issuing the forms needed to allow taxpayers to file in accordance with the new capital gains rules by Jan. 31, 2025. Arrears interest and penalty relief, if applicable, will be provided for those corporations and trusts impacted by these changes that have a filing due date on or before March 3, 2025.

Finance also confirmed that even if Parliament is prorogued, or ultimately dissolved, the CRA will “generally continue to administer proposed legislation consistent with its established guidelines.” That being said, when Parliament does resume, if no bill is introduced and passed in the House of Commons, and the government signals its intent to not proceed with the proposed capital gains tax, the CRA would cease to administer it."

So two options: (1) pay the tax if you feel the legislation will eventually pass (CRA tax refund rate is currently 6%); or (2) pay the tax at the legal rate until it is known if the passes or not (CRA overdue tax rate is currently 8%)

Sources: CRA January 8, 2025 Businesses: Here are the top changes that will affect business taxes in 2025 - The CRA is administering proposed capital gains inclusion rate legislation; Financial Post January 9, 2025 How to handle the uncertainty about capital gains in tax filing this year

Continue reading "What Prorogation of Parliament Means For The Capital Gains Legislation"

November 27, 2024
CRA Updated Guidance - 2024 Capital Gains Relief

The legislation to enact the proposed 66.7% capital gains inclusion rate effective June 25, 2024 is held up in Parliament due to the filibuster launched by the Conservatives. It has not been introduced as a bill yet.

As a result, tax returns cannot be filed because the tax software isn't available yet. Tax software can only be released once CRA certifies their tax forms. CRA can't release updated tax forms until the legislation is passed. It's a mess.

The CRA has posted 2024 guidance on their webpage 'T4037 Capital Gains 2023' that they will be proceeding based on the Notice of Ways and Means Motion that has been filed.

"For all taxpayers, the new inclusion rate will apply to capital gains realized on or after June 25, 2024. Impacted forms for individuals, trusts and corporations are expected to be on Canada.ca as of January 31, 2025. Arrears interest and penalty relief, if applicable, will be provided for those corporations and trusts impacted by these changes that have a filing due date on or before March 3, 2025. The interest relief will expire on March 3rd. More information will be forthcoming in the coming weeks."

A Globe and Mail November 27, 2024 article by Rudy Mezzetta titled 'Despite interest and penalty relief, questions abound for corporations navigating capital gains changes' puts forth three filing options:

1. File and pay taxes based on the current 50% inclusion rate;

2. Manually adjust the existing forms and pay taxes using the 66.7% inclusion rate;

3. File using the current forms but calculate and pay taxes based on the higher rate.

The CRA will be administering the proposed capital gains inclusion rate while awaiting parliamentary approval. This is a standard practice.

Taxpayers in limbo: Compliance in uncertain times 

CPA Canada News October 15, 2024 article Taxpayers in limbo: Compliance in uncertain times says "The legislation to enact these proposed changes has not yet been introduced in the House of Commons, and with the minority government stuck debating parliamentary privilege and facing multiple non-confidence motions, it is hard to determine when, or even if, these tax proposals will reach royal assent.".

June 13, 2024
Capital Gains Inclusion Rates Upcoming Change

Effective June 25, 2024, the capital gains inclusion rate will increase from 50% to 66.67% for (1) capital gains over $250,000 per year for individual, and (2) all capital gains for corporations and most trusts*. This change does not affect the principal residence exemption.

These are things you cannot do to lessen your capital gain tax burden:

- Current rules do not permit elections to realize a gain or loss on property without an actual transfer.

- Capital gains cannot be averaged over multiple years to stay under the threshold.

- Individuals cannot share their $250,000 annual threshold with corporations they own.

- The 66.67% exclusion rate applies across all sectors and all assets. There is no preferential treatment.

- There are no special rules based on how long an asset has been held.

Source: Department of Finance News - Fair and Predictable Capital Gains Taxation June 10, 2024

*Graduated rate estates (GREs) and qualified disability trusts (QDTs) eligible for the $250,000 threshold available to individuals.

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