The capital gains tax in Canada is a tax applied to the profit earned from selling capital assets, such as stocks, real estate (excluding a principal residence), and business assets. Currently, 50% of capital gains are included in taxable income, but significant changes are on the horizon.
Upcoming Changes to Canada’s Capital Gains Inclusion Rate
The Canadian government has announced a deferral of the proposed increase to the capital gains inclusion rate (CGIR) until January 1, 2026. Originally scheduled for June 25, 2024, this change will see the inclusion rate rise from 50% to 66.67% for individuals earning over $250,000 in annual capital gains and for all capital gains realized by corporations and most trusts.
Dominic LeBlanc, Minister of Finance and Intergovernmental Affairs, stated that deferring the CGIR increase will provide certainty for taxpayers as they prepare for the upcoming tax season.
Government’s Position and Opposition
The announcement follows the prorogation of Parliament on January 6, 2025. The Canada Revenue Agency (CRA) has been designated to administer the CGIR changes as outlined in the Ways and Means motion tabled in the House of Commons in September. However, the changes still require approval through formal legislation.
Political opposition has surfaced regarding these tax changes:
- Conservative Party Leader Pierre Poilievre has pledged to repeal the CGIR increase if elected.
- Former Finance Minister Chrystia Freeland, a leading Liberal Party figure, has stated that she no longer supports the CGIR hike, despite initially introducing it in last April’s federal budget.
Reactions from Financial and Business Organizations
The decision to delay the CGIR increase has been met with mixed reactions:
- CPA Canada expressed that the deferral offers temporary relief but believes the government should reconsider the tax increase entirely due to economic uncertainty.
- The Canadian Federation of Independent Business (CFIB) welcomed the delay, citing concerns about rising taxation and economic instability.
- CFIB President Dan Kelly emphasized the need for clear legislation to prevent future tax uncertainty. He suggested a system similar to the United Kingdom’s tax laws, where prorogation automatically reverts tax rates to their previous levels if legislation is not passed.
Other Key Changes to Capital Gains Taxation in 2024 and 2025
In addition to the CGIR changes, the 2024 federal budget introduced the following measures:
- Increase in the Lifetime Capital Gains Exemption (LCGE):
- Rising from $1,016,836 to $1.25 million (effective June 25, 2024)
- Applies to small business shares, farming, and fishing properties
- Canadian Entrepreneurs’ Incentive:
- Lowers the inclusion rate to 33.33% on up to $2 million in eligible capital gains for business owners selling their companies.
- Phased in at $400,000 per year starting January 1, 2025, reaching $2 million by 2029.
- Combined with the LCGE increase, eligible entrepreneurs could benefit from an exemption of at least $3.25 million in capital gains.
- Principal Residence Exemption:
- No capital gains tax applies when selling a primary home.
Projected Revenue from the CGIR Increase
According to an August 2024 report from the Parliamentary Budget Officer, the CGIR hike is expected to generate $17.4 billion in additional tax revenue over the next five fiscal years.
Conclusion: How Will the Changes Impact You?
For high-income investors, business owners, and corporations, the increase in the capital gains inclusion rate will significantly impact taxation strategies. If passed into law, individuals and businesses may need to adjust their investment plans before the January 1, 2026 implementation date.
For taxpayers considering selling assets, early tax planning and consultation with a financial advisor will be crucial to navigating these upcoming changes and optimizing tax efficiency.
Stay Updated: As legislation develops, staying informed about capital gains tax updates in Canada will help you make informed financial decisions.
Take Action Today
Navigating capital gains tax changes can be complex, but you don’t have to do it alone. Book an appointment today to speak with a financial expert and ensure you’re making the best decisions for your investments and tax planning.
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