The federal government has deferred its planned increase to the capital gains inclusion rate, pushing the implementation date from June 25, 2024, to January 1, 2026. Finance Minister Dominic LeBlanc announced the decision, citing economic and administrative concerns as tax season approaches.
"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," said LeBlanc. "Given the current context, our government felt that it was the responsible thing to do."
The move follows mounting pressure from business groups, tax professionals, and legal experts, who raised alarms about the lack of formal legislation and the potential economic fallout. The capital gains inclusion rate hike—from 50 per cent to 66.7 per cent—was set to apply to:
- Individuals: Capital gains exceeding $250,000 annually
- Corporations and Trusts: All capital gains
Government’s Original Justification for the Tax Hike
In June 2024, then-Finance Minister Chrystia Freeland defended the tax increase as a move toward fairness.
"Today, it is possible for a carpenter or a nurse to pay tax at a higher marginal rate than a multi-millionaire. That isn’t fair. That is why our government is raising the inclusion rate on annual capital gains above $250,000 for individuals."
At the time, the government projected the increase would generate $19.4 billion over five years to fund housing, affordability, and economic growth initiatives. The tax hike was also framed to ensure that wealthy investors and corporations contributed their fair share.
Now, just months later, the government is delaying the policy, with economic and legal uncertainty forcing a major shift in messaging. Following the deferral, the Canada Revenue Agency (CRA) confirmed it will continue administering the existing 50 per cent inclusion rate until January 1, 2026.
- All capital gains realized before January 1, 2026, will be taxed at 50 per cent, unless an exemption applies.
- Late-filing penalties and arrears interest relief will be granted:
- Individuals (T1 filers): Until June 2, 2025
- Trusts (T3 filers): Until May 1, 2025
- Corporations: Businesses can continue using existing forms and tax software. However, the CRA will automatically reassess any companies that preemptively filed under the proposed two-thirds rate.
Legal Challenge: CRA Overstepped Authority, Court Filing Alleges
The deferral follows a legal battle launched against the CRA by Thorsteinssons LLP, Canada’s largest tax law firm.
On January 27, the firm filed a Federal Court application for Pelco Holdings Inc., a B.C.-based company, arguing that the CRA illegally attempted to enforce a tax law that Parliament never passed.
The application claims:
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The CRA "contravened the rule of law" by directing taxpayers to report capital gains under an unenacted draft inclusion rate.
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The CRA’s premature enforcement put taxpayers in an “untenable position,” forcing them to choose between complying with the actual Income Tax Act (which still reflects a 50 percent inclusion rate) or following CRA guidance based on draft legislation.
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Failure to block the CRA’s actions could result in Canadians paying more in taxes than legally required—with no guarantee of reimbursement if the law was never formally enacted.
Thorsteinssons LLP sought a Federal Court order preventing the CRA from enforcing the proposed tax hike until Parliament properly passed it.
Business Community Reacts: "Welcome News, But Unfinished Business"
The Canadian Federation of Independent Business (CFIB), representing 100,000 small and medium-sized businesses, welcomed the delay but criticized the lack of legislative clarity.
"This will be welcome news to many small business owners who were facing higher taxes from a tax change that was proceeding despite the lack of any legislation from Parliament," said Dan Kelly, CFIB President. "With the uncertainty Canadians face due to U.S. tariffs and our domestic political situation, making clear that taxes on entrepreneurship will not rise at this time is especially important."
The CFIB is now calling for tax policy reforms, pushing for a model similar to the United Kingdom, where tax authorities have six months to pass legislation related to taxation changes. If Parliament prorogues before the bill is passed, the tax rates automatically revert to previous levels.
New Exemptions and Incentives Still Moving Forward
While the capital gains inclusion rate increase is delayed, other tax measures remain on track:
- Principal Residence Exemption: Capital gains on primary residence sales remain tax-free.
- $250,000 Annual Threshold: Starting in 2026, individuals earning up to this amount in capital gains—including sales of secondary properties like cottages—will retain the 50 per cent inclusion rate.
- Lifetime Capital Gains Exemption Increase: The exemption for small business shares and farm/fishing property will rise from $1.016 million to $1.25 million on June 25, 2024.
- Canadian Entrepreneurs’ Incentive:
- Reduces the inclusion rate to one-third on a lifetime maximum of $2 million in eligible capital gains.
- Phases in from 2025 to 2029.
- Intended to encourage investment in Canadian startups.
Meanwhile, business groups and tax experts continue pressuring the government to reconsider the increase.
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