On January 31, 2025, the Minister of Finance (the “MOF”) announced that the federal government will defer the effective date on which the capital gains inclusion rate would increase, from the proposed date of June 25, 2024 to January 1, 2026. As a result, the Canada Revenue Agency (the “CRA”) will not administer the proposed increase to the capital gains inclusion rate for taxation years ending on or before December 31, 2025. Instead, capital gains realized before January 1, 2026 will be subject to the currently enacted inclusion rate of 1/2.
Changes to the Effective Date of the Capital Gains Inclusion Rate
The originally proposed bill would have increased the capital gains inclusion rate from 1/2 to 2/3 for capital gains realized after June 24, 2024, for corporations and certain trusts. For individuals and graduated rate estates, only the portion of capital gains realized after June 24, 2024 that exceed $250,000 would have been subject to the increased 2/3 inclusion rate.
However, due to MOF’s and CRA’s announcements, the capital gains inclusion rate will remain at 1/2 for capital gains realized on or before December 31, 2025. It is proposed that the new capital gains inclusion rate of 2/3 will only take effect starting January 1, 2026.
Uncertainty Regarding the New Capital Gains Inclusion Rate
The originally proposed bill to increase the capital gains inclusion rate has not yet been signed into law. With prorogation of Parliament, all bills that have not been signed into law are terminated and must be reintroduced in the new session, or risk being abandoned. As such, a new bill will now have to be proposed for any increases in the capital gains inclusion rate. With the current political sentiment, there is no guarantee that any proposed bill will become law.
How to File?
The announcement clears the uncertainty on how capital gains realized during 2024 and 2025 should be reported for tax purposes.
For capital gains realized on or before December 31, 2025, you should file based on the current 1/2 capital gains inclusion rate. As a result, capital gains realized during 2024 and 2025 should be reported under the current rules.
The CRA will also provide relief in respect of late-filing penalties and arrears interest until June 2, 2025, for affected personal tax returns, and until May 1, 2025, for affected trust tax returns, to provide additional time for such taxpayers that must report capital dispositions.
For corporations that already followed CRA’s previous guidance to file their tax returns using the 2/3 capital gains inclusion rate, the CRA will coordinate corrective reassessments to reverse the application of the 2/3 inclusion rate.
While transactions on or after January 1, 2026 may be subject to higher income tax inclusion rate based on the revised proposed legislation, we expect further guidance from the MOF and the CRA in the future on the administration of such proposals.
How Does this Affect the Lifetime Capital Gains Exemption?
In addition, the CRA has confirmed that the increase in the Lifetime Capital Gains Exemption (the “LCGE”) from $1,016,836 to $1,250,000 is to remain effective starting June 25, 2024. Accordingly, the proposed implementation date for the increase in the LCGE should not be affected by the deferral of the increase in the capital gains inclusion rate.
GG Observations
With dynamic changes to tax policies and administration during recent weeks, it can be quite cumbersome to understand how you may be affected. Grewal Guyatt LLP has extensive experience in navigating CRA guidance and administrative policies and can help you decide how best to file your tax returns while minimizing the risk of being penalized. For more information, please contact our tax team.
