Understanding the Capital Gains Deferral and Upcoming Tax Changes

/ N.I. Cameron Inc/

The Government of Canada recently announced a deferral in the implementation of the proposed changes to the capital gains inclusion rate, shifting the effective date from June 25, 2024, to January 1, 2026. This decision provides taxpayers—both individuals and businesses—with additional time to plan their financial strategies accordingly.

Key Highlights of the Capital Gains Inclusion Rate Change

The capital gains inclusion rate determines how much of a capital gain is subject to taxation. As per the revised timeline:

  • Until December 31, 2025, the inclusion rate remains at 50% for all capital gains.

  • Effective January 1, 2026, the inclusion rate will increase to two-thirds (66.67%) on:

    • All capital gains exceeding $250,000 per year for individuals.

    • All capital gains for corporations and most types of trusts.

Measures to Mitigate the Impact on Middle-Class Canadians

To ensure that middle-class Canadians are not disproportionately affected, the government is implementing several exemptions and incentives:

1. Principal Residence Exemption

Canadians will continue to benefit from the Principal Residence Exemption, meaning no capital gains tax will apply when selling their primary home.

2. New $250,000 Annual Threshold (Effective January 1, 2026)

  • Individuals will continue to be taxed at the 50% inclusion rate on the first $250,000 of annual capital gains.

  • This applies to secondary properties such as cottages, investment properties, and other assets.

  • For couples, a combined exemption of $500,000 will be available when selling shared assets.

3. Increased Lifetime Capital Gains Exemption (LCGE) (Effective June 25, 2024)

  • The LCGE for small business shares, farming, and fishing property will increase from $1,016,836 to $1.25 million.

  • This increase ensures that business owners and entrepreneurs benefit from tax relief before the new inclusion rate takes effect.

4. Introduction of the Canadian Entrepreneurs’ Incentive (Effective 2025 Tax Year)

  • A reduced capital gains inclusion rate of one-third (33.33%) will apply to up to $2 million in eligible lifetime capital gains for entrepreneurs.

  • This incentive will gradually increase, reaching its full $2 million limit by 2029.

  • When combined with the LCGE, entrepreneurs will see tax relief on up to $6.25 million in capital gains.

What This Means for Taxpayers

The deferral to 2026 provides individuals and businesses additional time to assess their financial plans. Key considerations include:

  • Timing the sale of investments or properties to take advantage of the 50% inclusion rate before 2026.

  • Maximizing exemptions, particularly the new annual threshold and the increased LCGE.

  • Strategic planning for entrepreneurs to benefit from the reduced inclusion rate under the Canadian Entrepreneurs’ Incentive.

Next Steps

The federal government will introduce legislation to enact these changes in the coming months. Taxpayers are encouraged to consult with financial and tax professionals to optimize their strategies based on their unique circumstances.

If you have questions about how these changes may affect you, feel free to reach out to our team for expert tax planning advice!