Ottawa offers taxpayers relief with capital gains tax delay

Article content

In a surprise announcement on Friday, the government announced a deferral in the implementation of the increase to the capital gains inclusion rate to January 1, 2026, removing the uncertainty that has been hanging over Canadians’ heads since Parliament was prorogued in early January.

Article content

Article content

The April 2024 federal budget proposed an increase to the capital gains inclusion rate for gains realized on or after June 25, 2024, whereby the inclusion rate was increased to 66.67 per cent, up from 50 per cent. Individuals and certain trusts would still be entitled to the former 50 per cent inclusion rate on the first $250,000 of capital gains annually. Corporations and most family trusts would not.

Article content

In a press release Friday, Dominic LeBlanc, Minister of Finance and Intergovernmental Affairs, announced that the June 25, 2024, implementation date would be changed to Jan. 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. Given the current context, our government felt that it was the responsible thing to do.”

How did we get here? Here’s a quick recap.

Following the April 2024 federal budget, the government introduced a notice of ways and means motion (NWMM) in Parliament on June 10 containing draft legislation to implement the tax change. The next day, the House of Commons voted and agreed upon it, yet no bill to implement the draft legislation was then tabled. On August 12 the Department of Finance released updated legislative proposals relating to capital gains inclusion rate changes.

In September, a second NWMM was tabled in the house, containing revised draft legislation. The house never voted to adopt it. Despite this, in November the Canada Revenue Agency (CRA) announced that while the capital gains tax increase had yet to be formally adopted by Parliament, it would begin administering the capital gains tax as of June 25, 2024.

Article content

Article content

Fast-forward to January 6, when the Governor General, on the advice of Prime Minister Justin Trudeau, prorogued Parliament until March 24, such that all unfinished business, including the NWMM, died on the order paper. Shortly after, the CRA published a statement on its website saying that “notwithstanding that Parliament is prorogued, the CRA will continue to administer the proposed capital gains legislation.” It advised that new forms will be available by end of January 2025, and that arrears interest and penalty relief, if applicable, will be provided for corporations and trusts impacted by these changes that have a filing due date on or before March 3, 2025.

In mid-January, Conservative leader Pierre Poilievre promised to eliminate the increase to the capital gains inclusion rate if elected. This was followed a week later by an announcement from Liberal leadership hopeful and former finance minister Chrystia Freeland who also vowed to scrap the capital gains tax hike if she is elected.

In a C.D. Howe Institute study published last week entitled A Kafkaesque Tax Quagmire: Why We Need to Defer or Abandon the Failed Capital Gains Changes, co-authors Carl Irvine, a tax lawyer and a member of the institute’s fiscal and tax policy council, and John Tobin, a tax partner at Torys LLP, said the federal government’s proposed increase to the capital gains inclusion rate has created “a nightmarish scenario” for Canadians. They argued that taxpayers face a difficult choice: pay at the higher rate now and struggle to recoup overpayments if the measure dies, or follow existing law and risk interest and penalties should it eventually pass.

Article content

The authors called on the government to abandon the proposed increase, or failing that, delay the effective date to at least Jan. 1, 2025, “to spare taxpayers the gamble of filing 2024 returns under a measure that may never pass.”

In addition, the Canada Revenue Agency was facing at least two lawsuits in federal court, challenging the CRA’s authority to administer the tax hike, absent formal parliamentary approval.

Facing enormous pressure from individual taxpayers, as well as the tax preparation industry, the announcement was welcome news to accountants who were about to embark on a challenging personal tax season, not knowing whether to report clients’ capital gains post-June 24 at the proposed 66.67 per cent inclusion rate, or at the current rate of 50 per cent, which remains the law in Canada as of today.

Of course, whether the increase to the capital gains tax rate ever comes into force will depend on what happens politically, given a looming 2025 federal election and potential change in government.

Article content

As part of Friday’s press release, the government also announced that several other measures related to the capital gains tax rules that are beneficial to taxpayers would be maintained. These include: maintaining the unlimited principal residence exemption, which ensures Canadians do not pay capital gains taxes when selling their home; increasing the lifetime capital gains exemption to $1.25 million, effective June 25, 2024, from the current amount of $1,016,836 on the sale of small business shares and farming and fishing property; and proceeding with the new Canadian Entrepreneurs’ Incentive, to encourage entrepreneurship by reducing the inclusion rate to one-third on a lifetime maximum of $2 million in eligible capital gains. This incentive is set to take effect starting in the 2025 tax year and the maximum would increase by $400,000 each year, reaching $2 million in 2029.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com.

If you liked this story, sign up for more in the FP Investor newsletter.

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here.

Article content