What Canada’s deferred capital gains tax change means for your taxes

The problem is the legislation never passed. Following Prime Minister Justin Trudeau’s decision to prorogue Parliament in early January, the Canada Revenue Agency (CRA) encouraged taxpayers to proceed as if the tax change was happening, even though it seemed unlikely to become law.

Now, there’s a new update. The federal government has deferred the implementation of the change to the capital gains inclusion rate to January 1, 2026. Here’s what this means for taxpayers.

What’s changing about the capital gains inclusion rate?

The capital gains inclusion rate is the percentage of a capital gain that’s included in taxable income. The rate has been one-half since 2000, but the 2024 federal budget proposed an increase to two-thirds for the following:

• Individual taxpayers with more than $250,000 of capital gains in a single tax year, on only the portion in excess of $250,000. A one-half income inclusion rate would continue to apply to capital gains below $250,000.
• All capital gains realized by corporations.
• All capital gains realized by trusts other than graduated rate trusts (GREs) and qualified disability trusts (QDTs). These trusts would be eligible for the same $250,000 annual exemption as individuals.

New inclusion rate rules deferred until 2026

The change was to take effect on June 25, 2024, so some taxpayers acted to realize capital gains by June 24 (for example, by selling a cottage property) to take advantage of the lower inclusion rate. In many cases, this resulted in accelerating the payment of capital gains tax that would have otherwise not been paid.

This deferral will obviously disappoint those who acted based on the government’s directive, especially now that it seems unlikely the new rules will ever be implemented—even in 2026.

There are a few reasons for this. Parliament is prorogued until March 24, 2025—notwithstanding the possibility that a trade war between Canada and the U.S. could lead to an early recall—which means no new legislation can be introduced or passed.

An election is coming one way or the other in 2025, and right now, the Conservatives appear to have the edge. Conservative leader Pierre Poilievre has said he will not proceed with the capital gains tax increase if his party wins. Chrystia Freeland, one of the frontrunners to lead the Liberals in place of Justin Trudeau into the next election, has also said she would kill the tax reform—despite the fact she was the finance minister who initially tabled the budget and the capital gains tax change.

What about other capital gains tax changes?

The Department of Finance confirmed other changes related to capital gains in the 2024 budget are going ahead as planned.

The Lifetime Capital Gains Exemption (LCGE), which was $1,016,836 at the start of 2024, rose to $1,250,000 effective June 25, 2024. This exempts from capital gains the sale of small business shares and farming and fishing properties.

The new Canadian Entrepreneurs’ Incentive came into effect on January 1, 2025, reducing the capital gains inclusion rate to one-third on capital gains by founding investors in certain sectors. These entrepreneurs must own at least 10% of the shares of their business, and the company must have been their principal employment for at least five years. The 2025 limit of $400,000 is scheduled to increase by $400,000 annually beginning in 2026, before reaching a maximum of $2,000,000 in 2029.

Looking ahead to 2026 and beyond

If you realized capital gains prior to June 25, 2024, in anticipation of a higher tax rate, the bad news is the inclusion rate increase is deferred, if not dead. The outcome of the upcoming federal election will determine once and for all if the tax change will apply in 2026, and that seems unlikely at the moment.

Small-business owners and entrepreneurs will be happy to have access to a higher Lifetime Capital Gains Exemption and the Canadian Entrepreneurs’ Incentive.

In the last couple years, we’ve seen last-minute changes to bare trust and underused housing tax reporting requirements. The adjustment to the capital gains inclusion rate is now the latest example. Canadian taxpayers and tax professionals hope for a smoother rollout of future tax policies. But, as always, I recommend planning based on what you know right now and avoid speculating about what the future may hold. And we now know with certainty that the one-half capital gains inclusion rate will apply for 2024 and 2025 capital gains.

Read more about capital gains tax:

• When does the capital gains tax inclusion rate increase take effect?
• How it works: Capital gains tax on the sale of a property
• The tax implications of buying a second home in Canada
• Yes, a cottage is an investment property—here’s how to minimize 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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