Understanding the Latest CRA Update on Capital Gains Taxation
The Canada Revenue Agency (CRA) has announced an update on the proposed changes to capital gains tax changes in Canada. Initially, the government planned to increase the capital gains inclusion rate from one-half to two-thirds for certain taxpayers starting June 25, 2024. However, this implementation has now been deferred to January 1, 2026. This delay provides businesses, investors, and individuals with additional time to plan for the upcoming adjustments.
This guide outlines the key capital gains tax changes in Canada, their implications, and what taxpayers need to do to remain compliant.
1. Current Capital Gains Inclusion Rate
As of now, capital gains in Canada are taxed at an inclusion rate of one-half (50%), meaning only half of any capital gain is subject to tax. This rate will remain in effect until January 1, 2026, unless additional legislative changes are introduced.
2. Proposed Capital Gains Taxation Changes
The federal government had proposed changes to increase the inclusion rate for capital gains exceeding $250,000 annually for individuals and for all capital gains realized by corporations and most types of trusts. However, the revised timeline means that the inclusion rate will not change until 2026. This gives taxpayers additional time to evaluate their investment strategies and consider potential tax planning measures.
3. Lifetime Capital Gains Exemption (LCGE) Update
Although the inclusion rate change has been postponed, the planned increase in the Lifetime Capital Gains Exemption (LCGE) limit to $1.25 million for eligible capital gains remains effective for dispositions occurring on or after June 25, 2024. This exemption provides significant tax relief for individuals selling qualifying small business shares, farming, and fishing properties.
Additionally, indexation of the LCGE is expected to resume in 2026, ensuring that the exemption keeps pace with inflation.
4. Administrative Adjustments and CRA Filing Relief
To accommodate the delay in the capital gains inclusion rate changes, the CRA is making adjustments to its administrative processes, including:
- Updated Forms and Systems: The CRA is revising tax forms and digital systems to reflect the continued inclusion rate of one-half (50%). These updates are expected to be available in the coming weeks.
- Filing Relief: To assist taxpayers adjusting to these updates, the CRA will offer penalty and interest relief for late-filed capital gains tax returns:
- T1 Individual Filers: Filing relief until June 2, 2025.
- T3 Trust Filers: Filing relief until May 1, 2025.
- Corporations: Corporate taxpayers should continue using existing tax forms that reflect the one-half inclusion rate. If returns have already been filed using the previously proposed two-thirds rate, the CRA will issue corrective reassessments.
5. Implications for Tax Planning
With the capital gains tax changes now scheduled for 2026, individuals and businesses should take advantage of the additional time to:
- Review investment portfolios to determine if it is beneficial to realize capital gains before the higher inclusion rate takes effect.
- Consider tax deferral strategies to align with the updated timelines.
- Reassess succession planning for business owners, farmers, and investors who may be affected by the changes.
- Stay informed about any further CRA updates and ensure compliance with evolving tax regulations.
Final Thoughts on Capital Gains Tax Changes
The postponement of the capital gains inclusion rate increase to January 1, 2026 provides taxpayers with additional time to plan their financial strategies effectively. However, the increase in the Lifetime Capital Gains Exemption (LCGE) to $1.25 million remains in effect from June 25, 2024, making it an important consideration for those planning to sell qualifying assets.
Staying informed and proactive in tax planning is essential in navigating these capital gains tax changes in Canada. If you need expert guidance on how these updates impact your tax strategy, TMP’s team of experienced CPAs is here to help. Contact us today to discuss your capital gains tax planning and compliance needs.