In a welcome development for taxpayers, the Department of Finance ("Finance") announced on January 31, 2025 (the "Announcement") that it would defer the implementation of the proposed increase to the capital gains inclusion rate from June 25, 2024 to January 1, 2026. As a result, all capital gains realized before January 1, 2026 will continue to be subject to the existing one-half inclusion rate.
Broadly speaking, the 2024 Federal Budget proposed the following increases to the capital gains inclusion rate:
- from one-half to two-thirds for capital gains realized by corporations and trusts on or after June 25, 2024; and
- from one-half to two-thirds for the portion of capital gains realized by individuals on or after June 25, 2024 in excess of an annual $250,000 threshold.
As outlined in our January 23, 2025 Tax Notes article, Prorogation and the proposed capital gains inclusion rate increase: Transactions completed before June 25, 2024, Finance had previously indicated that, notwithstanding prorogation, the Canada Revenue Agency (the "CRA") would administer the Income Tax Act (Canada) (the "Tax Act") based on the increased capital gains inclusion rate set out in the 2024 Federal Budget, which had not been enacted prior to prorogation.
As part of the Announcement, Finance also confirmed that the government will maintain or enhance existing capital gains exemptions while creating new incentives for investment by:
- maintaining the existing principal residence exemption;
- increasing the lifetime capital gains exemption ("LCGE") from $1,016,000 to $1,250,000 effective June 25, 2024; and
- introducing the proposed Canadian Entrepreneurs' Incentive, effective January 1, 2025, which would reduce the capital gains inclusion rate to one-third on a lifetime maximum of $2,000,000 in eligible capital gains.
In the Announcement, Finance stated that the government intends to introduce legislation in due course to implement the increase in the capital gains inclusion rate, the increase to the LCGE, and the Canadian Entrepreneurs' Incentive. However, it remains uncertain whether these measures will ultimately be passed in a subsequent session of Parliament.
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