What to know as Canada’s capital gains tax changes remain in legal limbo

What are the proposed changes to capital gains tax?

The capital gains inclusion rate would change for capital gains realized on or after June 25, 2024. Instead of the one-half (50%) capital gains inclusion rate that has applied since 2000, exempting one-half of a capital gain from tax, the following would apply:

• Individuals: A one-half inclusion rate would continue to apply on the first $250,000 in capital gains in a single year. Capital gains exceeding $250,000 in a single year would be subject to a two-thirds (66.67%) inclusion rate (on the portion above $250,000), with only one-third exempt from tax.
• Corporations: All capital gains would be subject to a two-thirds inclusion rate, with only one-third exempt from tax.
• Trusts: All capital gains taxed in a trust would be subject to a two-thirds inclusion rate, with only one-third exempt from tax. Exemptions would apply for graduated rate estates and qualified disability trusts, which would have the same $250,000 exemption as individuals.

What has the legislative process entailed?

The federal government introduced a notice of ways and means motion on June 10 to amend the Income Tax Act and outline the capital gains tax change. The motion passed, but the amendment must still be formally made into law. A subsequent notice of ways and means motion containing a draft version of the bill was tabled on September 23 but has not yet passed.

There have been two non-confidence votes for the Liberals initiated by the Conservatives this fall, aimed at setting in motion a federal election. One option for the prime minister is to prorogue parliament to take the political pressure off temporarily. This would effectively suspend parliament, and house committees would need to be re-established. Legislative changes, like the capital gains inclusion rate amendment in the Income Tax Act, could continue to be delayed.

If there was an election prior to the tax change being enacted into law, there is at least a chance it never comes to pass.

What does this mean for capital gains in 2024 and beyond?

There’s a possibility those who opted to sell investments prior to June 25 to trigger capital gains at a lower tax rate will have done so unnecessarily. They may end up paying tax they could have deferred by not selling in the first place.

Those who sold real estate in a rush may be particularly disappointed. The short time horizon to sell may have led to sellers accepting lower prices to close prior to June 25. Many buyers knew this and bid accordingly in an already weak housing market.

If the capital gains inclusion rate change does not pass and the Conservatives are elected, it seems unlikely they would proceed with the change after voting against the notice of ways and means motions twice. But anything is possible.

Tax planning in uncertain times

Tax planning can be difficult even when the rules are clear. When the rules are in flux and hinge on a government being able to pass a new law, there’s always a chance a taxpayer acts prematurely. Sometimes, a consultation period for a tax change can even lead the government to reconsider the amendment or delay it.

This fall has been a contentious time in U.S. politics with the recent election. A federal election is brewing in the next year in Canada, which promises to make for some political excitement on this side of the border as well.

Read more about capital gains in Canada:

• Capital gains tax in Canada, explained
• Year-end tax and financial planning considerations
• Yes, a cottage is an investment property—here’s how to minimize capital gains tax
• How to prepare for future changes in tax policy—including capital gains tax

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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