Uncertainty about when and how the federal government’s proposed tax increases on capital gains will take effect was cleared up on Friday when Ottawa announced it was delaying the start of the multibillion-dollar plan until Jan. 1, 2026.
The proposed increase to the proportion of capital gains – the profit realized when someone sells an asset like a property or a stock for a higher price than what they originally acquired it for – that are taxed was first unveiled in the April, 2024, federal budget and detailed in June.
Currently, only half of capital gains is included in computing a taxpayer’s income. Ottawa wants to raise that proportion to two-thirds. For individuals, however, the higher rate would apply only to annual profits above $250,000, with gains up to that threshold still subject to the one-half rate. The sale of a home designated as a principal residence would remain exempt from capital-gains taxes.
The changes were supposed to take effect as of June 25, 2024. But legislation was not approved before Prime Minister Justin Trudeau prorogued Parliament earlier this year, leaving the major policy proposal in limbo.
Finance Minister Dominic LeBlanc said Friday’s decision to defer was driven by the need to provide certainty ahead of tax season. Officials had said the Canada Revenue Agency would continue to administer the tax change, with the understanding that there would be future refunds in the event it does not eventually become law.
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Mr. LeBlanc said the government will introduce legislation to implement the change in due course, but it remains unclear how. Opposition parties have vowed to defeat the Liberal minority government after Parliament returns in March if the next prime minister does not trigger an election first.
Canadian business groups, which had strongly opposed the increase, welcomed Friday’s announcement but urged Ottawa to go further and scrap the plan entirely.
While the proposed policy isn’t set to take effect until next year, here is what taxpayers need to know.
The $250,000 threshold will also apply to two types of trusts
The $250,000 exemption doesn’t generally apply to corporations and trusts, but Ottawa announced in June a small proposed exception for two types of testamentary trusts: graduated rate estates and qualified disability trusts.
The first generally arises after an individual’s death, when their estate – the assets they leave behind – is usually taxed using the same graduated tax rates that would apply to any individual taxpayer for a period of up to three years.
A qualified disability trust, which also takes effect after an individual’s death and is subject to graduated tax rates, can be set up for beneficiaries who live with disabilities and are eligible for the federal disability tax credit.
According to the proposed rules, annual capital gains realized inside a graduated rate estate or a qualified disability trust would be eligible for the $250,000 threshold available to individuals without the need to allocate those profits to a beneficiary in the year.
No option to trigger capital gains pre-emptively without selling
The June guidance from the Department of Finance provides no option for taxpayers to choose to trigger capital gains at the 50-per-cent inclusion rate before June 25 without selling or gifting an asset they own.
“We were hoping that Finance was going to put into the legislation an elective process allowing somebody to, in a sense, tick a box on a form and say they deemed to dispose of that asset, avoiding the necessary selling costs,” John Oakey, vice-president of taxation at Chartered Professional Accountants of Canada Oakey, said at the time.
Generally, such a move would result in a taxpayer paying any taxes on profits realized before the implementation date at the current, lower inclusion rate. At the same time, it would raise the cost basis of the asset, thus likely reducing the tax liability on expected future profits.
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Individuals can’t share the $250,000 threshold with their trust or corporation
The government’s June guidance also made it clear it won’t allow individuals to share the annual $250,000 exemption for which they’re eligible with their trust or corporation, Mr. Oakey said.
Instead, the threshold will apply only to capital gains realized directly by individuals.
