Understanding the Changes in Capital Gains Tax: Key Updates from the CRA
As of January 31, 2025, the Canada Revenue Agency (CRA) provided a crucial update regarding proposed changes to the capital gains taxation system, with significant implications for both individual taxpayers and corporations. In this post, we’ll break down these changes, what you need to know, and how they will affect the filing of capital gains in Canada starting in 2026.
What's Changing?
In an announcement made by the Department of Finance, the government confirmed that it plans to increase the capital gains inclusion rate from the current rate of 50% to 66.67% (two-thirds), but they have delayed the effective date from June 2024 to January 1, 2026.
What Happens Before 2026?
Since the new rate will not take effect until January 1, 2026, the CRA has clarified that the current capital gains inclusion rate of 50% will remain in place for any gains realized before this date. This means that if you are filing your taxes for the 2025 tax year or earlier, you will continue to use the existing inclusion rate unless an exemption applies to your situation.
Lifetime Capital Gains Exemption (LCGE) Update
In addition to changes to the inclusion rate, there is a proposed increase to the Lifetime Capital Gains Exemption (LCGE) limit. The government intends to raise the LCGE to $1.25 million for eligible capital gains, as detailed in the previous Notice of Ways and Means Motion (NWMM) presented in Parliament on September 23, 2024. This measure will still go forward, with the new LCGE limit applying to capital gains realized on or after June 25, 2024. Moreover, the indexation of the LCGE is set to resume in 2026, ensuring that the exemption limit keeps pace with inflation over time.
What Does This Mean for Taxpayers?
Individual Taxpayers (T1 filers)
If you're filing your taxes as an individual, you will continue to use the current capital gains inclusion rate of 50% for any dispositions occurring before January 1, 2026.
Corporations (T2 filers)
Corporations will continue to file using the existing 50% inclusion rate on capital gains until the new system is implemented in 2026. For those few corporations that filed under the guidance of the NWMM released on September 23, 2024 (based on the two-thirds inclusion rate), the CRA will make corrective adjustments and reassessments to reverse the application of the new rate.
Trust Filers (T3 filers)
For trusts, the existing inclusion rate applies to any capital gains realized before the effective date of the new rate. Additionally, the CRA has extended the deadline for late-filing relief until May 1, 2025 for impacted T3 Trust filers.
The Political Landscape: Will the New Rules Be Supported?
While the proposed changes to the capital gains inclusion rate are currently slated to take effect on January 1, 2026, there is a growing belief that the new government may not support these rules, especially considering that no political party has voiced support for the increase in its current form. Representatives from all major parties have expressed concerns about the potential impact on businesses, individuals, and overall economic stability, suggesting that the proposal could face significant opposition.
Given this lack of support, it's highly likely that these capital gains tax changes could be revisited, revised, or even scrapped altogether depending on the outcome of future government discussions and negotiations. Taxpayers should remain cautious, as the landscape may change drastically before 2026.
What’s Next for Taxpayers and CRA Systems?
The CRA is working to update its systems and forms to reflect these changes and to ensure that taxpayers can meet their reporting requirements as soon as possible. Individual taxpayers and trusts will be able to access new forms soon, and all relevant parties are encouraged to stay tuned for further announcements.
For those impacted by these changes, it’s important to start preparing for these adjustments. However, given the political uncertainty, it may be wise to stay flexible and be ready for possible revisions as the new government makes its position clear.
Final Thoughts: Staying Informed and Prepared
The upcoming changes to Canada’s capital gains taxation system will have far-reaching effects for individuals, corporations, and trusts. While the new two-thirds inclusion rate won’t take effect until 2026, now is the time to ensure you’re on top of these changes, especially if you have significant capital gains or are involved in trusts or corporate filings.
However, with the political landscape in flux and no current support for these changes, it’s prudent to remain cautious. Consulting with a tax professional will be crucial to navigating these shifting rules, ensuring you are compliant, and optimizing your tax strategy—whether these changes ultimately go through or not.
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Disclaimer: This commentary is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice, nor does it constitute solicitation to buy or sell any securities referred to. Any tax information published on this blog is based on the facts provided to us and on current tax law (including judicial and administrative interpretation) during the time of publication. Tax law can change (at times on a retroactive basis) and these changes may result in additional taxes, interest, or penalties. Practice due diligence and if in doubt, speak with a member of our team.
