The Department of Finance has announced a deferral in the implementation of the previously proposed increase to the capital gains inclusion rate. Initially set to take effect on June 25, 2024, the increase has now been postponed to January 1, 2026. This adjustment affects individuals, corporations, and most trusts.
Key Highlights:
- Current Inclusion Rate Maintained Until 2026: The capital gains inclusion rate will remain at 50% until January 1, 2026.
- Future Increase: Starting January 1, 2026, the inclusion rate is set to rise to 66.67% for:
- Individuals with annual capital gains exceeding $250,000.
- All capital gain realized by corporations and most trusts
Exemptions and Incentives:
To mitigate the impact of this change, the government has introduced several measures, all of which were previously announced or in place in some form or fashion:
- Principal Residence Exemption: Canadians will continue to be exempt from paying tax on capital gains when selling their principal residence.
- $250,000 Annual Threshold: Effective January 1, 2026, individuals can benefit from the current 50% inclusion rate on the first $250,000 of annual capital gains. For example, assuming no other capital gains in the year, a couple selling a secondary property with a $500,000 capital gain would not face increased taxation due to this threshold.
- Lifetime Capital Gains Exemption Increase: Starting June 25, 2024, the exemption limit will rise to $1.25 million from the current $1,016,836. This applies to the sale of qualified small business corporation shares and qualified farming and fishing properties.
- Canadian Entrepreneurs’ Incentive: Beginning in the 2025 tax year, this new incentive reduces the inclusion rate to 33.33% on a lifetime maximum of $2 million in eligible capital gains. The maximum will increase by $400,000 annually, reaching $2 million in 2029. Combined with the enhanced lifetime exemption, entrepreneurs could benefit from reduced taxation on capital gains up to $6.25 million.
Implications for Tax Planning
This deferral provides certainty for individuals, corporations and trusts to plan and file their tax returns accordingly. It’s advisable to review your investment strategies and consult with a tax professional to understand how these changes may affect your financial planning.
For more information, please refer to the official announcement from the Department of Finance.
If you have any questions or need assistance navigating these changes, please contact your Virtus Advisor.
