Finance defers increase to capital gains inclusion rate to 2026

“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,” Dominic LeBlanc, minister of finance and intergovernmental affairs, said in the release.

After the prime minister prorogued Parliament on Jan. 6, Finance announced that the Canada Revenue Agency (CRA) would administer the CGIR tax changes as proposed in a notice of ways and means motion tabled in the House of Commons in September.

Friday’s announcement comes after two separate applications were filed in Federal Court asking for a judicial review of CRA’s administration of the proposed changes.

While the CRA’s practice is to administer proposed legislation, the capital gains changes still need to be introduced in a bill and passed into law. Conservative Party Leader Pierre Poilievre has said he would drop the CGIR changes if elected. Meanwhile, Chrystia Freeland, the former finance minister and Liberal leadership candidate, has said she no longer supports the proposal that she introduced as a measure in last April’s federal budget.

In response to Friday’s news, CPA Canada said in a release that the decision to delay implementation of proposed changes to the CGIR provides temporary relief for taxpayers. “However, amid growing economic uncertainty, CPA Canada believes [the government] should consider rescinding the proposed changes entirely,” it said.

The Canadian Federation of Independent Business (CFIB) said it was “pleased” by the deferred increase to the CGIR.

“With the uncertainty Canadians face due to U.S. tariffs and our domestic political situation, making clear that taxes on entrepreneurship will not rise at this time is especially important,” CFIB president Dan Kelly said in a release.

Kelly also said the government should introduce rules for the provisional implementation of tax.

“CFIB will be lobbying the next federal government to put in place legislation similar to the United Kingdom, which allows its tax authority no more than six months to pass legislation and makes clear that prorogation in Parliament automatically returns tax rates to their previous levels if legislation was not passed,” Kelly said.

Following Finance’s announcement about the deferred CGIR, the CRA said in a release it will grant relief of late-filing penalties and arrears interest until June 2, 2025, for impacted individual filers and until May 1, 2025, for impacted trust filers “to provide additional time for taxpayers reporting capital dispositions to meet their tax filing obligations.”

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 tabled in Parliament in September, the CRA will “coordinate corrective reassessments to reverse the application of the two-thirds inclusion rate,” the release said.

In its release, Finance highlighted the other measures introduced in budget 2024 related to the increase in the CGIR.

As announced in the budget, the lifetime capital gains exemption will increase to $1.25 million, effective June 25, 2024, from $1,016,836, on the sale of small business shares and farming and fishing property.

“With this increase, Canadians with eligible capital gains below $2.25 million would pay less tax and be better off, even after the inclusion rate increases on Jan. 1, 2026,” Finance said in the Friday release.

The department also highlighted the Canadian Entrepreneurs’ Incentive, which reduces the inclusion rate to one-third on a lifetime maximum of $2 million in eligible capital gains when an entrepreneur sells their business. The measure was included in legislative proposals from Aug. 12 and applies to dispositions on or after Jan. 1, 2025.

As proposed, the lifetime limit would be phased in at $400,000 per year, beginning on Jan. 1, 2025, before reaching $2 million by 2029.

Combined with the increased lifetime capital gains exemption of $1.25 million, entrepreneurs would have a combined exemption of at least $3.25 million once the incentive is fully rolled out.

Finance also reminded homeowners that “any amount they make when they sell their home will remain tax-free,” because of the principal residence exemption.

The department said it will introduce legislation for the increase in the CGIR, the increase in the lifetime capital gains exemption and the introduction of the Canadian Entrepreneurs’ Incentive “in due course.”

The CGIR changes were estimated to raise $17.4 billion over the next five fiscal years, according to a Parliamentary Budget Officer report from August.