The Federal Government Announces Deferral to Increase the Inclusion Rate on Capital Gains Tax

By Mirjana (Mira) Markovic

Last year I wrote an article on the proposed modifications to the capital gains tax inclusion rate. The full article can be accessed by clicking here.

To summarize, when the Federal Government announced its budget on Tuesday, April 16, 2024, it proposed to increase the inclusion rate on capital gains on proceeds of sale on assets like stock, mutual funds, income properties, and businesses. Specifically, individuals who realize/generate more than $250,000.00 in capital gains in any given year, would be taxed at the 67% inclusion rate instead of the current 50%.

The budget was approved and was set to take effect on June 25, 2024. However, on January 31, 2025, in an astonishing announcement, the Federal Government reported that it would be deferring the date on which the increased capital gains inclusion rate would take effect. As of now, the new date is set to January 1, 2026.

Facing enormous strain from individual taxpayers, as well as tax professionals, the announcement was welcome news to accountants who were about to embark on a challenging personal tax season, not knowing whether to report clients’ capital gains post-June 24 at the proposed 67% inclusion rate or at the current rate of 50%, which remains the law in Canada as of today.

Furthermore, the Federal Government also announced that several other measures related to the capital gains tax rules would be maintained. This includes: the unlimited principal residence exemption, which ensures Canadians do not pay capital gains taxes when selling their home; increasing the lifetime capital gains exemption to $1.25 million, effective June 25, 2024, from the current amount of $1,016,836 on the sale of small business shares and farming and fishing property; and proceeding with the new Canadian Entrepreneurs’ Incentive, to encourage entrepreneurship by reducing the inclusion rate to one-third on a lifetime maximum of $2 million in eligible capital gains. This particular incentive is set to take effect starting in the 2025 tax year and the maximum would increase by $400,000 each year, reaching $2 million in 2029.

Whether the increase to the capital gains tax rate ever comes into force will depend on what happens politically, given the emerging and unsettling 2025 federal election and potential change in Government.

I hope that this article has provided you with some helpful information. If you have any questions, please do not hesitate to contact me at mira@sorbaralaw.com.