Minister of Finance Canada Provides Clarity on Capital Gains Rate

On January 31, 2025, Canada’s Minister of Finance announced that implementation of the planned increase in the capital gains inclusion rate (from 50% to 66 2/3%) would be delayed, along with several other announced but not yet passed tax measures. The proposal was initially intended to be effective for capital gains realized on or after June 25, 2024 (subject to a proposed $250,000 annual capital gains exemption for individuals), however, the government announced that the increase will now be effective on January 1, 2026. This means that Canadian taxpayers, both individuals and corporations, will continue to benefit from the current 50% inclusion rate on capital gains for transactions made before January 1, 2026. For the 2024 tax year, taxpayers will not need to account for the increase in capital gains tax. As part of the announcement, the government also confirmed that it would maintain key exemptions like the Principal Residence Exemption and Lifetime Capital Gains Exemption (“LCGE”) to support Canadian taxpayers, with the announced increase of the LCGE to $1.25 million remaining effective as of June 25, 2024. Additionally, the implementation date of January 1, 2025 for the proposed Canadian Entrepreneurs’ Incentive will remain unchanged.

For Canadian taxpayers, the delay in the implementation of the capital gains tax increase  is welcome news and provides much-needed certainty in preparing and determining their upcoming tax filings and payments. However, some taxpayers remain impacted by this legislative limbo, having previously filed or triggered capital gains tax based on the pre June 25, 2024 capital gains inclusion rate in anticipation of the announced increase. These taxpayers may ultimately be the ones to bear the burden, having paid tax early and missing out on potential future capital gains in respect of these assets. For any taxpayers who have already filed and paid tax on the basis of the proposed increase, the Canada Revenue Agency (“CRA”) has announced that it will coordinate corrective reassessments. Nevertheless, taxpayers should also consider filing Notices of Objection to their current assessments to protect their rights in the case of any delays or error by the CRA in issuing the reassessments. We recommend that any taxpayers who undertook planning or already filed their tax returns discuss with their advisors or reach out to us to explore possible impacts along with any future tax planning opportunities.

If you have any questions with respect to the matters discussed above, please contact Mariam Al-Shikarchy at [email protected], Adam Solomon at [email protected] or any other member of our Tax practice group.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.