How Canada’s Deferred Capital Gains Change Affects Your Taxes

The 2024 federal budget proposed raising Canada’s capital gains inclusion rate, but the measure has not become law. The change would have increased the portion of capital gains included in taxable income for certain individuals, and for all corporations and most trusts, with an effective date of gains realized on or after June 25, 2024.

After Parliament was prorogued in early January, the proposed legislation stalled and never passed. During prorogation, the Canada Revenue Agency (CRA) advised taxpayers to prepare as if the change would be implemented, which led some people to realize gains before the original effective date. However, the federal government has now deferred the implementation of the higher inclusion rate until January 1, 2026. This update affects how taxpayers should view capital gains realized in 2024 and 2025.

What is the capital gains inclusion rate change?

The capital gains inclusion rate determines the share of a capital gain that is added to taxable income. Since 2000, that rate has been 50%. The 2024 budget proposed increasing it to 66.67% (two-thirds) in three specific circumstances:

• For individuals, only the portion of capital gains in a single tax year that exceeds $250,000 would be taxed at the higher two-thirds inclusion rate. Gains below $250,000 would continue to be taxed at the one-half rate.
• For corporations, all capital gains would be included at the higher two-thirds rate.
• For trusts, all capital gains would be taxed at the higher rate except for graduated rate estates (GREs) and qualified disability trusts (QDTs). Those trusts would retain the $250,000 exemption similar to individual filers.

New inclusion rate rules deferred until 2026

The higher inclusion rate was scheduled to take effect for gains realized on or after June 25, 2024. Anticipating the change, some taxpayers accelerated dispositions—selling assets such as cottages or other properties before June 25—to take advantage of the existing 50% inclusion rate. In many cases that accelerated activity led to immediate tax payments they might otherwise have deferred.

With the federal government now deferring the change until January 1, 2026, those who acted early will be disappointed. Because Parliament remains prorogued until at least March 24, 2025, and an election is expected in 2025, there is uncertainty about whether the increase will ever be enacted. Leading political figures have publicly indicated they would not pursue this reform if their party takes power, which makes the chances of the change taking effect in 2026 uncertain.

What other capital gains measures remain in place?

The Department of Finance has confirmed that certain other capital gains measures in the 2024 budget are moving forward.

The Lifetime Capital Gains Exemption (LCGE) rose to $1,250,000 effective June 25, 2024 (it was $1,016,836 earlier in 2024). The LCGE provides an exemption on capital gains from the sale of qualifying small business shares and farming or fishing property.

Separately, the Canadian Entrepreneurs’ Incentive came into effect on January 1, 2025. That program reduces the capital gains inclusion rate to one-third for founding investors in qualifying businesses who meet ownership and employment criteria. The incentive includes a phased increase to the maximum lifetime limit, beginning at $400,000 in 2025 and rising annually toward the stated maximum.

What this means for taxpayers now and in future

For gains realized before June 25, 2024, the inclusion rate remains at 50% for the 2024 and 2025 tax years given the federal deferral. Taxpayers who accelerated dispositions in anticipation of a higher rate may find the deferral frustrating, because those accelerated transactions triggered tax liabilities earlier than they might otherwise have occurred.

Looking ahead, the ultimate status of the proposed inclusion rate increase will depend on the outcome of the next federal election and whether Parliament enacts the legislation. For small-business owners and qualifying entrepreneurs, the higher Lifetime Capital Gains Exemption and the Canadian Entrepreneurs’ Incentive provide current benefits worth considering when planning future transactions.

Tax rules can change quickly and sometimes at the last minute. Taxpayers and advisors should base planning decisions on the law as it stands today and avoid speculative strategies that assume future legislative changes. As of now, the one-half inclusion rate applies to capital gains realized in 2024 and 2025, and any shift to a higher rate remains deferred until at least January 1, 2026 or until Parliament enacts new legislation.

Read more about capital gains tax:

• When does the capital gains tax inclusion rate increase take effect?
• How capital gains tax works on the sale of a property
• Tax implications of buying a second home in Canada
• Treating a cottage as an investment property and minimizing capital gains tax