The ongoing saga of the proposed increase in the capital gains inclusion has finally come to an end – for now.
On January 31, 2025, the Department of Finance announced that it will defer the implementation of the proposed increase in the capital gains inclusion rate until January 1, 2026. These changes were originally to take effect retroactively, beginning June 25, 2024.
As discussed in a previous blog post, many will recall that this proposed change was announced in the April 2024 Federal Budget and was to increase the capital gains inclusion rate (i.e., the portion of capital gains that are subject to tax) from 1/2 to 2/3 – effectively increasing the tax rate applicable to capital gains by 50%. Individuals would still have been entitled to the 1/2 inclusion rate on up to $250,000 of capital gains annually.
Confusion reigned since then, with draft legislation only introduced in the summer, then updated in the fall to correct certain technical issues. But while the proposed changes were never introduced as a bill and never officially became law, the Canada Revenue Agency announced that it would administer the proposed changes as though they were law – this despite continuing to assess tax returns using the 1/2 inclusion rate. In the meantime, Parliament has been prorogued and a Liberal leadership race was announced, with no progress on these proposed changes and the various sides of the political spectrum (and even within the Liberal party) announcing different positions on this proposal.
Many taxpayers have been struggling with how to report transactions they entered into, with some actually liquidating investments in order to pay tax at the lower rates, albeit paying sooner than they otherwise would have. Other taxpayers with large pending sale transactions were left to rearrange their original plans in an attempt to have their capital gain fall into the pre-June 25, 2024 period. Many were also left to reconsider how their Estates would pay an increased tax liability for which it was almost impossible to plan ahead.
Given the uncertainty created by this situation, the Department of Finance’s announcement to defer this change is welcome relief. That said, taxpayers will want to consider how this about-face impacts their particular situation, including:
- anyone who undertook tax planning to allow for the possibility of triggering capital gains prior to June 25, 2024 at the 1/2 inclusion rate should consider how they now report these transactions. In many cases, this planning would have been based filing an election to either trigger a capital gain or not, so those elections will need to be filed taking into account the recent developments, and all tax planning steps will need to be properly documented; and
- corporations with taxation year ends of June 30, 2024 or later may have made the decision to “overstate” capital gains on the assumption that the 2/3 capital gains inclusion rate would retroactively apply. These corporations should review their basis of reporting and will want to amend their originally-filed tax returns to report the correct taxable capital gain, as well as the corporation’s capital dividend account balance.
Another piece of good news from the Department of Finance is that they still plan to proceed with the increase to the capital gains exemption effective June 25, 2024. This proposal increases the amount of capital gains that an individual may shelter from tax in connection with the sale of “qualified small business corporation shares” and “qualified farm or fishing property” to $1,250,000 (from $1,016,836). This may have an impact on how individuals report certain capital gains they may have realized in 2024 from the sale of qualifying properties (including from capital gains realized by trusts).
While these announcements from the Department of Finance are welcome news, you should discuss them with your Welch LLP advisor to determine exactly how this impacts your specific situation and how to deal with some of the remaining uncertainty.