Tax Update: Proposed Increase to Capital Gains Inclusion Rate Deferred to 2026

On January 31, 2025, the Minister of Finance (Canada) announced that the proposed increase in the capital gains inclusion rate from one-half to two-thirds, previously intended to be effective for dispositions occurring on or after June 25, 2024, will be deferred until January 1, 2026. This announcement is the latest development in the saga of these proposed changes to the capital gains regime originally announced in the 2024 Federal Budget (see our 2024 Federal Budget bulletin.)

The change will be very welcome for taxpayers with dispositions in 2024 or 2025 that would otherwise have faced a higher effective tax rate. It may also simplify compliance for calendar-year taxpayers by having changes effective on January 1 and not in the middle of the calendar year. However, if the proposals are ultimately enacted, complex transition rules, which have been one of the sources of uncertainty with the proposed rules, will still be necessary to address taxpayers with non-calendar year ends.

The Minister’s announcement did not include many details, but key features include:

• The increase in inclusion rates to two-thirds remains the same, but with implementation deferred to January 1, 2026
• The already-proposed C$250,000 “safe harbour” (at the existing 50% inclusion rate) remains unchanged, including being restricted to individuals only
• The timing for implementation of the previously-announced increase to the lifetime capital gains exemption and the introduction of the Canadian Entrepreneurs’ Incentive is not changing
• The announcement is silent about any relief for taxpayers that triggered taxable dispositions in advance of the previous implementation date of June 25, 2024

Shortly after the Minister’s announcement, the Canada Revenue Agency announced the following:

• It will revert to administering the currently-enacted capital gains inclusion rate of 50% for all capital gains realized prior to 2026
• It will issue tax forms for individuals and trusts that reflect this change (it had previously issued some new forms assuming a June 25, 2024, implementation date for the inclusion rate increase)
• It will grant relief in respect of late-filing penalties and arrears interest until May 1, 2025, for impacted T3 trust filers (normal deadline: March 31, 2025)
• It will grant relief in respect of late-filing penalties and arrears interest until June 2, 2025, for individual T1 filers (normal deadline: April 30, 2025)
• Corporate taxpayers can continue to use existing forms and tax software to file using the 50% inclusion rate until further notice
• For the “small number” of corporations that have followed CRA’s guidance to file on the basis of the increased inclusion rate being effective June 25, 2024, it will coordinate corrective reassessments to reverse the application of the higher inclusion rate

Notably, no relief has been announced for partnerships (which generally have a March 31, 2025, filing deadline), although it is hoped that this is merely an oversight.

It would appear that many taxpayers, such as investment fund managers, who had changed their systems in intended compliance with the change in inclusion rate and related forms will now have to change everything back for 2024 (and in some cases, redo forms that had already been prepared).

For further information, please contact any member of our Tax group.