Prepare for Upcoming Tax Policy Changes and Capital Gains Tax

Income tax rules are always changing — sometimes with little warning and often in ways that create uncertainty for Canadians.

In the past year, for example, last-minute announcements from the Department of Finance altered reporting obligations for the underused housing tax (UHT) and for bare trust filings. Reporting requirements for the UHT were significantly reduced for Canadian residents, trusts, partnerships and corporations, and bare trust tax returns will only be required if the Canada Revenue Agency (CRA) directly requests them.

Because those adjustments were announced late and implemented quickly, many Canadians are closely watching the proposed capital gains changes introduced in Budget 2024.

The government did not include capital gains changes in the initial budget bill tabled in May. Finance Minister Chrystia Freeland introduced a notice of ways and means motion on June 10, and a parliamentary vote to formalize the rules is expected soon. With Parliament about to recess for summer, however, the capital gains measures may not become law until the fall.

With so much uncertainty, how should Canadians prepare for potential changes to capital gains taxation?

Selling assets? Read our capital gains guide.Read now

What’s changing about capital gains in Canada

Budget 2024 proposes raising the capital gains inclusion rate for certain taxpayers. Currently, only 50% of a capital gain is included in taxable income. The proposal would increase that inclusion rate to 66.67% (two-thirds) for some dispositions. Tax-deferred and tax-free accounts such as registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs) remain excluded from capital gains taxation, so the proposed change applies to taxable investment accounts and capital assets like cottages or rental properties.

Those most affected include:

Individuals realizing more than $250,000 in capital gains in a single year (the higher inclusion rate would apply only to gains above the $250,000 threshold)
Corporations
Trusts

Individual owners of capital-intensive assets — a vacation property, rental unit, family business or farm — are most exposed because these assets are typically sold in one transaction. Investors with publicly traded stocks, mutual funds or exchange-traded funds (ETFs) can often stagger sales over multiple years to avoid crossing the $250,000 threshold.

Tax-planning considerations for business owners

Under the proposed rules, business owners selling qualified small business corporation shares or qualified farm or fishing property could still use the lifetime capital gains exemption (LCGE) of up to $1,250,000 to reduce or eliminate taxable gains and offset the higher inclusion rate.

Budget 2024 also proposes a new Canadian entrepreneurs’ incentive that could shelter up to $2 million of additional capital gains tax-free by Jan. 1, 2034. The incentive would roll out in $200,000 increments annually from 2025 through 2034.

Corporate tax policy has shifted in recent years. Reforms such as the tax on split income introduced in 2018 limited the ability to move dividend income among family members, and changes to corporate tax rates have altered the dynamics of retaining earnings inside a corporation. For many small-business owners, corporate tax rates on active business income generally fall in the vicinity of 9% to 12.2%, depending on province or territory, creating an incentive to defer personal taxation by holding funds inside the company.

The proposed higher inclusion rate on corporate capital gains strengthens the case for withdrawing funds from a corporation and holding them personally — for example, in registered accounts like RRSPs or TFSAs — when that strategy reduces overall tax or allows access to more favourable tax treatment for future gains.

Should you trigger capital gains before June 25?

The budget indicates that the new inclusion rate would apply to dispositions on or after June 25. For corporations or individuals planning to sell appreciated investments in the near term, realizing gains before that date could lead to materially lower tax owing. Estimates suggest the income tax cost of selling investments after June 25 could be roughly one-third higher than selling before that date, for affected taxpayers.

Because securities market settlement moved to a T+1 cycle on May 27, 2024 (trade date plus one business day), a trade must settle by June 24 to be treated as a disposition before June 25. In practice, that typically means executing the sale by Friday, June 21 to ensure settlement by June 24.

What other tax changes might be possible?

No one can predict all future tax policy, but some sensible, proactive steps can help households shield against higher taxes in retirement. One common strategy is contributing to a spousal RRSP when there is a significant imbalance in retirement assets or pension income between partners. The higher-income spouse receives the tax deduction while the lower-income spouse holds the account and can withdraw funds later, helping to equalize retirement income and reduce combined taxes.

Since 2007, eligible pension income splitting has allowed retirees aged 55 and older (and certain RRIF recipients aged 65 and over) to allocate pension income between spouses to lower taxes. Policy on income splitting could change in the future, so spousal RRSPs remain a useful tool to manage household tax risk.

Other potential changes that are sometimes discussed include income-based TFSA contribution limits (similar to Roth IRA restrictions in the U.S.) or tightening the principal residence exemption for capital gains. In the U.S., the home-sale exemption is limited to $250,000 for individuals and $500,000 for couples; similar concepts occasionally surface in Canadian policy debates, particularly given ongoing housing affordability concerns.

How to hedge against uncertainty

My advice is to plan around the rules in force today, prioritize tax-efficient retirement income strategies, and avoid speculative moves based on possible future policies. Income smoothing in retirement — spreading taxable income across years to make use of lower tax brackets — remains a solid approach. It reduces the risk of being hit by higher tax rates later and mitigates estate implications of large, tax-deferred balances on death.

Discussions about changing capital gains taxation have been ongoing since 2016, and many taxpayers have only a short window to react to the latest proposal. But rushing into irreversible decisions can create unintended tax consequences. Evaluate options carefully with a tax or financial professional before accelerating gains or making structural changes to corporate or personal finances.

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