Update on Capital Gains Rate Change Proposals and Next Steps

To listen to an audio recording of this article, click here.

On January 31, 2025, the Department of Finance Canada announced a deferral – from June 25, 2024, to January 1, 2026 – of the date on which it proposes that the capital gains inclusion rate would increase from one-half to two-thirds on capital gains realized annually above $250,000 by individuals and on all capital gains realized by corporations and most types of trusts. The announcement also addressed various capital gains exemptions which will be maintained, enhanced or created, as previously announced. This includes the proposal to increase the lifetime capital gains exemption limit to $1.25 million of eligible gains, effective June 25, 2024.

In response to the above announcement, the Canada Revenue Agency indicated that it has reverted to administering the currently enacted capital gains inclusion rate of one-half, so that all capital gains realized before January 1, 2026, will be subject to an inclusion rate of one-half, unless an exemption applies. The Canada Revenue Agency will continue to administer the proposed increase to the lifetime capital gains exemption limit, which applies to dispositions that occur on or after June 25, 2024.

Next Steps

The clarity provided by the above announcements is welcome news for both the tax community and taxpayers. Despite these announcements, taxpayers who completed reorganization transactions to “crystallize” their accrued capital gains prior to June 25, 2024, should contact their tax advisors to understand whether it is prudent in their particular circumstances to defer the tax, that will otherwise be payable as a result of a crystallization transaction, by filing applicable tax elections (in prescribed form, within the prescribed time).

The proposal to increase the capital gains inclusion rate must still be introduced in Parliament and enacted into law. There can be no assurance that the proposal to increase the capital gains inclusion rate will be enacted as currently proposed, or at all.

The Tax Group at Aird & Berlis LLP is recognized for its expertise in tax planning and dispute resolution, ensuring optimal outcomes for clients. If you have any questions or would like more information on capital gains, please contact the author or a member of the group.