Canada Defers Changes to Capital Gains Tax

The federal government has made a last-minute adjustment to the planned increase in the capital gains inclusion rate. Other tax changes will proceed as originally scheduled.

The 2024 federal budget put forward a proposal to raise the capital gains inclusion rate in Canada. This change targeted specific capital gains realized by individual taxpayers, as well as all capital gains realized by corporations and trusts, to take effect for gains made on or after June 25, 2024.

However, the legislation stalled following Prime Minister Justin Trudeau's decision to prorogue Parliament in early January. Despite this, the Canada Revenue Agency (CRA) advised taxpayers to prepare for the change, assuming it would become law. The government has now pushed back the start date for this tax adjustment to January 1, 2026.

Understanding the Proposed Capital Gains Changes

The proposed change in the capital gains inclusion rate involves the portion of capital gains that must be reported as taxable income. Since 2000, this rate has been set at 50%, but the 2024 budget suggested an increase to 67% under certain conditions:

• Individual taxpayers who realize more than $250,000 in capital gains in a single tax year would be subject to the higher rate only on the excess amount. Gains below this threshold would continue to be taxed at the existing 50% rate.

• All capital gains realized by corporations would be included at the new 67% rate.

• The same higher rate would apply to all capital gains realized by trusts, with the exception of graduated rate trusts (GREs) and qualified disability trusts (QDTs), which would be eligible for the same $250,000 exemption as individuals.

  
  

Impact of the Deferral

The deferral to 2026 may frustrate those who, anticipating the new rules, took action such as selling assets before June 25, 2024, thus possibly incurring capital gains taxes earlier than necessary. This reaction was based on government guidance that is now seemingly premature, as legislative and political uncertainties cloud the likelihood of these changes being enacted—even by the new 2026 timeline.

Political Considerations

With Parliament recessed until March 24, 2025, and potential disruptions like a trade dispute with the U.S., there is a pause on legislative progress. Furthermore, an upcoming election in 2025 could pivot the fate of this tax reform. Conservative leader Pierre Poilievre has voiced opposition to the increase, promising to discard it if elected. Similarly, Chrystia Freeland, a potential Liberal leader, has expressed intentions to abandon the tax change that she once championed as finance minister.

Status of Other Related Tax Changes

Despite the uncertainty surrounding the capital gains inclusion rate, the Department of Finance has confirmed that other capital gains-related adjustments outlined in the 2024 budget will proceed as initially planned.

Capital Gains Conclusion

The ongoing shifts in the political landscape and legislative agenda present a challenging environment for taxpayers and advisors navigating capital gains tax planning. With the deferral of the inclusion rate increase and the potential for further policy reversals, stakeholders must stay informed and flexible in their financial strategies.