The CRA said it would revert to administering capital gains taxation under the current 50 per cent inclusion rate for capital gains realized up until Jan. 1, 2026.Justin Tang/The Canadian Press
Ottawa’s decision to defer the capital gains inclusion rate hike to next year was welcomed by tax experts, but there’s still uncertainty for investors looking to sell an appreciated asset.
On Jan. 31, the Department of Finance announced it would defer implementation of the government’s proposed capital gains inclusion rate hike until Jan. 1, 2026. The proposal, introduced in the 2024 federal budget, was set to increase the capital gains inclusion rate to 66.7 per cent from 50 per cent as of June 25, 2024, with individuals and some trusts still having access to the lower rate on annual gains under $250,000.
However, the government hadn’t tabled legislation to enact the change before Parliament was prorogued last month.
What it means for tax filing
The Canada Revenue Agency (CRA), which had stated it would administer the proposed capital gains changes, said on Jan. 31 it would revert to administering capital gains taxation under the current 50 per cent inclusion rate for capital gains realized up until Jan. 1, 2026.
The agency said it would give “impacted” individuals until June 2 to file their returns without interest or penalties, an extension beyond the April 30 deadline for T1 returns, and “impacted” trusts will have until May 1 (an extension from the March 31 deadline for filing 2024 T3 returns). The agency said the relief was to provide “additional time for taxpayers reporting capital dispositions to meet their tax filing obligations,” although it didn’t give any further explanation of what it meant by “impacted” taxpayers.
What about corporations?
The CRA said in its announcement that corporations could continue to use existing tax forms and software to file using the one-half inclusion rate “until further notice.”
For corporations that had already followed the CRA’s previous guidance and filed at the two-thirds inclusion rate, the agency said it would “co-ordinate corrective reassessments to reverse the application of the two-thirds inclusion rate.”
Delaying, not dropping, changes means continued uncertainty
Deferring the effective date to Jan. 1, 2026, eliminates tax-filing uncertainty related to capital gains tax until after a federal election is held sometime later this year, says John Oakey, vice-president of taxation at CPA Canada in Dartmouth, N.S.
However, deferring the implementation date rather than dropping the proposed changes entirely means uncertainty for individuals and incorporated clients who are considering selling appreciated assets, he says.
“This uncertainty will increase the closer we get to Jan. 1, 2026, or until we get certainty from the government,” Mr. Oakey says.
CPA Canada has called on Ottawa to consider scrapping the proposed changes altogether.
No relief for those who sold pre-June 25
The delay doesn’t help taxpayers who sold appreciated assets before the proposed June 25, 2024 implementation date to avoid the higher inclusion rate.
Tax experts say those individuals may now regret having triggered tax earlier than they would have otherwise and/or sold a property for a lower price than they might have received if they had sold it later.
“They did tax planning based on the best available information that had been provided to them by the government, and it turns out to have been, in some cases, not the right thing,” says Peter Bowen, vice-president of tax and retirement research at Fidelity Investments Canada ULC in Toronto.
What it means for related proposals
Lifetime capital gains exemption increase: To soften the blow of the higher inclusion rate for small businesses, the 2024 budget also proposed increasing the lifetime capital gains exemption (LCGE) for qualified small business corporations to $1.25-million from $1,016,836. The change was effective for dispositions of businesses that occurred beginning June 25, 2024 (with the indexation of the LCGE resuming in 2026).
The increase to the LCGE, which is included in the same draft legislation as the increase to the capital gains inclusion rate, also hasn’t passed into law. However, the CRA said in its Jan. 31 announcement it would administer the higher LCGE for sales as of June 25, 2024.
Tax experts expect that Ottawa will proceed with the higher LCGE even if there is a change in government.
“That shouldn’t be too overly problematic [for the next government] to say, ‘That’s a reasonable [tax proposal] people relied on,” Mr. Bowen says.
Canadian entrepreneurs’ incentive: Finance indicated in its Jan. 31 announcement that it still intends to move forward with the CEI, also announced in the 2024 federal budget but not passed into law.
The CEI, which is meant to encourage entrepreneurship, reduces the inclusion rate to one-third on a lifetime maximum of $2-million in eligible capital gains. This incentive would still take effect starting in the 2025 taxation year and the maximum would increase by $400,000 each year, reaching $2-million in 2029.
Employee stock options: Another budget proposal was to limit the stock option deduction to one-third to result in a two-thirds inclusion rate for the benefit, mirroring the changes to the capital gains inclusion rate.
In answer to a question from the Globe, Finance communications advisor Benoit Mayrand confirmed that the delayed implementation date applies to the taxation of employee stock options.
The deferral “of the implementation of the proposed increase in the capital gains inclusion rate also applies to the consequential changes made to reflect the increased inclusion rate in other areas of the tax system, including the employee stock option deduction,” Mr. Mayrand says.
Editor’s note: A previous version of this article stated the filing deadline for 2024 trust returns is March 30. The correct date is March 31.