Capital Gains Tax Inclusion Rate Increase: Effective Date

The federal government has announced it will defer the planned increase to the capital gains inclusion rate until next year and will introduce targeted exemptions so that most middle-class Canadians do not face higher taxes if the rate is adopted. Finance Minister Dominic LeBlanc said on Friday that the implementation date has been pushed back from June 25, 2024 to Jan. 1, 2026.

LeBlanc also said the government will table legislation in due course to enact changes to the inclusion rate together with an increase to the lifetime capital gains exemption and a new incentive aimed at entrepreneurs.

“The deferral of the increase to the capital gains inclusion rate will provide certainty to Canadians, whether they be individuals or business owners, as we quickly approach tax season,” LeBlanc said in a statement. “Given the current context, our government felt that it was the responsible thing to do.”

Why did the inclusion rate increase for capital gains tax?

The proposed change intends to raise the portion of capital gains that are taxable from one-half to two-thirds. That higher inclusion rate would apply to corporations and to individuals with capital gains above $250,000. The measure was proposed in the federal budget and introduced as a ways and means motion, but it has not been passed into law. Parliament is prorogued until March 24, so there has been no legislative vote on the proposal.

Despite the lack of parliamentary approval, the Canada Revenue Agency had already begun administering the change because parliamentary convention treats taxation proposals as effective once a notice of ways and means motion is tabled. The CRA has said it would halt administration of the policy only if Parliament resumes and the government signals it will not proceed with the proposed changes.

Conservative MPs and other critics argued that the agency’s early administration created months of uncertainty and a challenging tax-filing season for many Canadians.

Do Canadians need to file taxes using the new inclusion level?

Many taxpayers faced a difficult choice during the most recent filing season: file as if the increased inclusion rate had already taken effect or file based on the existing rate and risk adjustments later. That uncertainty was heightened because Parliament will not sit again for two months and political changes, including the party leadership process, left some observers predicting the government could fall before passing the measure.

LeBlanc’s deferral is intended to provide clarity and reduce that uncertainty. As part of his announcement, he said the government will raise the lifetime capital gains exemption to $1.25 million from roughly $1 million for qualifying small business shares and for farming and fishing properties. That exemption increase is effective June 25, 2024.

LeBlanc said the exemption increase, coupled with a new $250,000 annual threshold for capital gains, will protect many taxpayers. According to the government’s calculations, Canadians with lifetime capital gains below about $2.25 million would pay less tax overall, even after the higher inclusion rate becomes official on Jan. 1, 2026.

What is the capital gains incentive?

The government said the $250,000 annual threshold will apply to most types of capital gains, including gains on the sale of a secondary property such as a cottage. In practical terms, that means a couple realizing a $500,000 capital gain on a cottage sale would not pay higher tax as a result of the inclusion rate change, according to the government.

In addition, the government unveiled a Canadian Entrepreneurs’ Incentive that would lower the inclusion rate to one-third on a lifetime maximum of eligible capital gains. That incentive is scheduled to take effect in the 2025 tax year. The lifetime maximum will increase annually by set amounts until it reaches $2 million in 2029. The government says that, when combined with the new $1.25 million lifetime exemption, entrepreneurs would see a significantly improved tax outcome on capital gains of up to about $6.25 million.

While these measures aim to shield middle-class Canadians and incentivize entrepreneurs, they do not remove all criticism.

Critique of the capital gains tax confusion

The Council of Canadian Innovators expressed disappointment that the government did not fully retract the original change proposed under the previous finance minister. Its president said that providing genuine certainty would have required admitting the policy was a mistake and moving on.

The Canadian Federation of Independent Business described the deferral as welcome news for small businesses but said the episode highlights a broader policy issue: the need for clearer rules about provisional authority for the Canada Revenue Agency. The CFIB urged Ottawa to adopt limits similar to those in other jurisdictions so that a tax authority may not begin permanent collection without legislation being passed within a defined time frame. Its proposed approach would help ensure that, if Parliament does not approve a change before prorogation, tax rates revert automatically to earlier levels.

Read more about capital gains tax:

• Capital gains tax in Canada, explained
• How capital gains tax works on the sale of a property
• What to know while Canada’s capital gains tax changes remain in legal limbo