The Canadian federal government has announced it will delay the increase to the capital gains inclusion rate, providing much-needed clarity as tax season approaches. This decision, revealed by Finance Minister Dominic LeBlanc, shifts the effective date from June 25, 2024, to January 1, 2026, promising to introduce new exemptions aimed at minimizing tax burdens for middle-class Canadians.
During the announcement on January 31, 2025, LeBlanc emphasized the importance of certainty for Canadians, particularly business owners and taxpayers facing upcoming tax dilemmas. He stated, "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 situation, our government felt it was the responsible thing to do." This move is not just about good governance; it signifies the government's awareness of economic conditions and the pressures many Canadians are currently facing.
The decision to postpone the implementation of the capital gains tax increase, first proposed as part of the 2024 federal budget, reflects the political climate surrounding the legislation. The original policy aimed to raise the taxable portion of capital gains from 50% to two-thirds, applying to individuals earning capital gains exceeding $250,000 per year. It also targeted corporations and trusts, raising concerns particularly from sectors like agriculture and small businesses, who argued the proposed increase could hinder succession planning and overall productivity.
Notably, as Parliament was prorogued until March 24, the government did not have the legal authority to enact the change, leaving many Canadians entangled in uncertainty. The Canada Revenue Agency (CRA) had started to administer the planned changes early, causing unease among taxpayers unsure whether to prepare for the new rate or continue with the old one. LeBlanc’s latest announcement aims to alleviate this confusion and stem the tide of criticism from various sectors, particularly from key figures like Shopify executives who expressed concern about the adverse effects on innovation and entrepreneurship.
Alongside deferring the capital gains tax increase, the government plans to raise the lifetime capital gains exemption to $1.25 million from $1 million, effective June 25, 2024. This move will allow Canadians with capital gains below $2.25 million to benefit from reduced tax liabilities, even after the new inclusion rate takes effect. The new threshold of $250,000 for annual capital gains, also effective January 1, 2026, includes proceeds from secondary properties, like cottages. For example, couples selling a cottage yielding $500,000 will not pay additional taxes due to this exemption.
Another measure rolled out is the Canadian Entrepreneurs’ Incentive, which proposes to drop the inclusion rate on eligible lifetime capital gains to one-third, up to $2 million. This will take effect starting the 2025 tax year and will allow for annual increases of $400,000, potentially reaching $2 million by 2029. When combined with the new lifetime exemption, this reform is deemed to support entrepreneurship, enabling business owners to navigate the capital gains process more favorably.
The announcement was well-received by the Canadian Federation of Independent Business (CFIB), stating, "This will be welcome news to many small business owners who were facing higher taxes from a tax change proceeding without parliamentary legislation." CFIB President Dan Kelly expressed gratitude toward the government for recognizing the uncertainties small businesses face and urged future legislative changes for smoother provisions.
Political opposition to the capital gains tax increase has intensified, particularly from Conservative Leader Pierre Poilievre, who has promised to abolish the tax hike should he assume government. Even former finance minister Chrystia Freeland, who initially championed the increase, indicated she would not back it if elected as prime minister. With the upcoming federal election expected no later than October 2025, the Liberal Party faces pressure to reintroduce and pass the capital gains measures swiftly.
The increased tax rate would have been expected to raise around $19.4 billion over five years for Ottawa and $11.6 billion for the provinces and territories. Critics, meanwhile, question the accuracy of government estimates claiming only 0.13% of Canadians would be affected by the increased taxation. There’s skepticism surrounding how many would be impacted when actual dynamics and capital attributes are considered.
This delay reflects the balancing act the government must perform: managing economic issues as it navigates tax reforms, all the whilst staying attuned to the political currents steering the country. The fiscal challenges presented by increasing deficits and external pressures, such as possible U.S. tariffs, highlight the cautious approach the Canadian government is taking as it weighs fiscal policies against the needs of its constituents.
With the capital gains changes deferred until 2026, it provides some breathing room for Canadians and particularly small businesses at a time when economic conditions remain unpredictable. LeBlanc’s commitment to addressing the challenges head-on, though met with criticism, also reveals the government's intent to redefine its fiscal strategies to support sustained economic activity across the nation.