The Department of Finance Canada on Jan. 31, announced that the federal government is deferring the date on which the capital gains inclusion rate will increase from one-half to two-thirds, from last June 25, 2024 to Jan. 1, 2026.
The capital gains tax applies to gains realized annually above $250,000 for individuals and on all capital gains realized by corporations and most types of trusts.
In the announcement, the government added that it is maintaining the principal residence exemption, along with the $250,000 annual threshold and the increase in the Lifetime Capital Gains Exemption, which had been increased from just over $1-million ($1,016,836 currently) to $1.25-million. It is also keeping the new entrepreneurs’ incentive which reduces the inclusion rate to one-third on a lifetime maximum of $2-million in eligible capital gains.
“This incentive would take effect starting in the 2025 tax year and the maximum would increase by $400,000 each year, reaching $2-million in 2029. Combined with the new $1.25 lifetime capital gains exemption, when this initiative is fully rolled out, entrepreneurs would pay less tax and be better off on capital gains of up to $6.25-million,” they write. “The proposed implementation date for the increase in the Lifetime Capital Gains Exemption and the introduction of the Canadian Entrepreneurs’ Incentive would not change.”
CRA’s guidance
According to the Canada Revenue Agency (CRA), which issued its own guidance shortly after the announcement was made, the unchanged measure means the CRA will continue to administer that proposed change, which applies to dispositions that occurred on or after June 25, 2024.
The CRA explains: “the announcement confirms the government’s intention that, effective for dispositions that occur on or after January 1, 2026, the inclusion rate will increase from one-half to two-thirds on capital gains realized in excess of $250,000 annually for individuals and on all capital gains realized by corporations and most types of trusts.” They add that the CRA will issue forms with the current rate in the coming weeks.
“The CRA will grant relief in respect of late-filing penalties and arrears interest until June 2, 2025, for impacted T1 individual filers and until May 1, 2025 for impacted T3 trust filers to provide additional time for taxpayers reporting capital dispositions to meet their tax filing obligations,” the CRA added in a statement about the changes. (The change would appear to extend that relief by mere days only, the tax filing deadline for individuals being just one day before, on April 30.) “Now that the government has communicated its intentions regarding the proposed capital gains inclusion rate, we are working as quickly as we can to adjust our systems and forms so that taxpayers who need to report capital dispositions can do so as early as possible.”
They add that the CRA also plans to work with those who followed the CRA’s guidance to file based on the notice of ways and means which was tabled in Parliament in September 2024 announcing the changes. “The CRA will coordinate corrective reassessments to reverse the applications of the two-thirds inclusion rate,” they state. Although it did not elaborate in the release, the CRA adds that the number of affected corporations is small.