After some confusion surrounding whether or not proposed capital gains changes would take effect this upcoming tax season in the wake of Prime Minister Trudeau’s prorogation of parliament, the Department of Finance Canada is clearing things up for taxpayers.
On Friday, Minister of Finance and Intergovernmental Affairs Dominic LeBlanc announced that the date on which the capital gains inclusion rate would increase from one-half to two-thirds on capital gains realized annually above $250,000 is being deferred from June 25, 2024 to January 1, 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,” says LeBlanc in the press release. “Given the current context, our government felt that it was the responsible thing to do. I look forward to further conversations with Canadians on how we can ensure Canada’s fiscal policy encourages robust and sustained economic activity in every region of our country.”
In a press release from the government, the reasoning for the grace period is “to ensure most middle-class Canadians do not pay more tax once the capital gains inclusion rate is increased.” In the meantime, the capital gains inclusion rate will remain at 50% and existing capital gains exemptions will be maintained, with some new investment incentives added as well.
To be maintained is the Principal Residence Exemption, where Canadians who sell the home they live in will not be taxed at any rate and the taxable threshold of $250,000 on the sale of a secondary property, such as a cottage, will also be maintained.
In addition, the government is increasing the Lifetime Capital Gains Exemption to $1.25 million up from $1,016,836 on the sale of small business shares and farming and fishing property, effective June 25, 2024. As well, anew Canadian Entrepreneurs’ Incentive would reduce the inclusion rate to one-third on a lifetime maximum of $2 million in eligible capital gains, encouraging entrepreneurship. The maximum would increase by $400,000 each year, reaching $2 million in 2029 and would be implemented in the 2025 tax year.
While the decision provides guidance and certainty for Canadians, CPA Canada is calling for a full repeal of the proposed capital gains changes, “citing growing economic uncertainty.” Still, they support the government taking action prior to tax filing season.
“This decision reflects the concerns that CPA Canada has consistently raised with the Minister of Finance,” says John Oakey, CPA Canada’s vice-president of tax. “The retroactive impact on the proposed legislation with a prorogued parliament was creating significant uncertainty for taxpayers and their advisors.”
As for a final answer on whether or not a new government will follow through with the capital gains changes, we can’t know. But for the upcoming tax season, at least, Canadians are expected to file according to the 50% inclusion rate.