Update re: Deferral of increase to capital gains inclusion rate to January 1, 2026 and updates on other draft tax legislation
On January 31, 2025, the Federal Government announced that the planned increase to the capital gains inclusion rate, originally set to take effect on June 25, 2024, will be deferred until January 1, 2026.
Capital gains inclusion rate increase
Background
Budget 2024 proposed to increase the capital gains inclusion rate from 50% to 66.67% effective June 25, 2024. For individuals, the first $250,000 of annual capital gains would continue to be subject to the 50% inclusion rate and the 66.67% inclusion would apply on the excess. For corporations and trusts, the 66.67% inclusion rate would apply to all capital gains realized on or after June 25, 2024.
This change would have increased the effective tax rate on capital gains for an Ontario resident in the highest tax bracket, for annual gains exceeding $250,000, from 26.77% (50% × 53.53%) to 35.69% (66.67% × 53.53%).
Our Comments
The draft tax legislation containing the capital gains inclusion rate increase did not receive Royal Assent before Prime Minister Justin Trudeau prorogued Parliament in January 2025. With opposition parties threatening to topple the government when Parliament resumes March 24, 2025, there has been significant uncertainty regarding how taxpayers should report capital gains on their 2024 tax returns.
The federal Conservative Party leader, along with several Liberal leadership contenders, have stated they would not proceed with the proposed capital gains inclusion rate increase. Given this opposition, it appears increasingly unlikely that the increase will ever take effect.
Despite this uncertainty, the Canada Revenue Agency (CRA) previously indicated it would continue processing 2024 tax returns based on the proposed increase to the inclusion rate. Many called on the federal government to instruct the CRA to not process 2024 returns based on the increased inclusion rate. The January 31, 2025 announcement has been an answer to those calls.
While the Government announcement has deferred the increase to January 1, 2026, we think it is unlikely given the current political environment that this increase will happen on January 1, 2026. We will need to wait for the results of the 2025 federal election to know for sure.
Status of other capital gains related items still in draft legislation
The same draft legislation containing the increase to the capital gain inclusion rate also proposed taxpayer friendly changes. The January 31, 2025 announcement signaled the government’s intention for these changes to still proceed at the original proposed dates including:
- Increasing the lifetime capital gains inclusion rate to $1,250,000 as of June 24, 2024.
- Canadian Entrepreneurs’ Incentive – Reduced inclusion rate to 1/3 on a lifetime maximum of $2 million in eligible capital gains. This incentive would take effect starting in the 2025 tax year and the maximum would increase by $400,000 each year, reaching $2 million in 2029.
Changes to employee stock option rules – deferral not provided (yet)
The January 31, 2025, announcement did not reference proposed changes to the taxation of employee stock options, which were intended to align with the capital gains inclusion rate changes. These changes were initially set to apply to stock option benefits realized on or after June 24, 2024.
We have written the Department of Finance and the Minister of Finance asking whether they will extend the January 1, 2026 deferral to the proposed changes impacting employee stock options. We think logically that they should but await confirmation. We hope this will be confirmed before the February 28, 2025 due date for T4 tax slips.
Donations made January 1, 2025 to February 28, 2025 to qualify as 2024 donations
The Department of Finance released draft tax legislation allowing cash and cash-equivalent donations (e.g., credit card payments) made between January 1, 2025 and February 28, 2025 to be treated as donations made in the 2024 tax year. The proposals do not apply to donations made in-kind (e.g., donated public securities).
These changes were made to help support charities impacted by the Canada Post Strike. The Canada Revenue Agency announced on January 23, 2025 that they intend to assess 2024 returns based on these proposals.
Disclaimer: This article is intended to inform readers in general terms. It is not intended to provide any tax or business advice. Please consult your Stern Cohen advisor if you have any questions about your unique situation. While we have tried to ensure the accuracy of the information in this article, we accept no liability for errors or omissions.