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Capital gains inclusion rate increase deferral: What we know and what we don’t

On Jan. 31, 2025, the Department of Finance (Finance) announced a significant deferral in the implementation of the proposed changes to the capital gains inclusion rate. While this is welcome news in a time of uncertainty, it will have sweeping effects on tax planning executed in 2024 and ongoing tax reporting.

What we know

Deferred implementation date ⁠–⁠ The increase to the capital gains inclusion rate (from one‑half to two‑thirds) has been postponed until Jan. 1, 2026. As a result, the Canada Revenue Agency (CRA) has announced they will revert to administering the currently enacted rates.

Individual Safe Harbour ⁠–⁠ The proposed $250,000 annual threshold for individuals will remain unchanged, taking effect Jan, 1, 2026.

Lifetime Capital Gains Exemption (LCGE) increase ⁠–⁠ The increase to the LCGE to $1.25 million will still be effective on or after June 25, 2024. The CRA has also noted indexation of the LCGE will resume in 2026.

Canadian Entrepreneurs’ Incentive ⁠–⁠ This incentive is expected to be introduced as planned, starting in the 2025 tax year.

Principal Residence Exemption (PRE) ⁠–⁠ While not tied to any existing or proposed legislation, Finance reiterated its commitment to the PRE.

Late‑filing penalties ⁠–⁠ The CRA will grant relief for late‑filing penalties and arrears interest until June 2, 2025, for impacted T1 Individual filers, and until May 1, 2025, for impacted T3 Trust filers. This will provide additional time for taxpayers reporting capital dispositions to meet their filing obligations.

Corporations ⁠–⁠ For the small number of corporations that followed the CRA’s guidance to file on the basis of the Notice of Ways and Means Motion (NWMM) tabled in Parliament on Sept. 23, 2024, the CRA will coordinate corrective reassessments to reverse the application of the two‑thirds inclusion rate.

What we don’t know

Although the changes to the stock option deduction, hybrid surplus and non‑resident withholding taxes were intrinsically linked to the decision to adjust the capital gains inclusion rate, there has been no release from Finance or the CRA to confirm these changes will also be deferred to Jan. 1, 2026. While it is reasonable to assume they would be, there has been no formal statement.

Other considerations

All planning undertaken in 2024 should be reviewed with your advisors, as there may be unforeseen consequences, like Alternative Minimum Tax that would have otherwise been made moot by the inclusion rate changes. As more information becomes available, we will provide updates.