The federal government has decided to delay its planned increase in the capital gains tax inclusion rate, moving the date to January 1, 2026. The announcement, made by Finance Minister Dominic LeBlanc on January 31, 2025, comes after an initial proposal in April 2024, which prompted a flurry of commercial real estate transactions as investors sought to divest before the tax hike took effect.
The increase in the capital gains tax was initially outlined in the 2024 federal budget, with the government’s aim to raise the inclusion rate from 50% to 66.67% for individuals on capital gains above $250,000, plus corporations and most trusts. However, the implementation of this policy faced an unexpected setback due to the prorogation of Parliament earlier this year, and, as a result, the decision was made to push the date back.
For now, investors will not face the anticipated tax increase for another two years. The deferral provides additional time for those concerned about the tax burden on capital gains, especially for high-net-worth individuals and businesses with significant real estate portfolios.
Despite the delay, the government still plans to proceed with other components of its fiscal policy, including increasing the Lifetime Capital Gains Exemption for small business shares and farming or fishing property to $1.25 million starting June 25, 2024, and launching the Canadian Entrepreneurs’ Incentive in 2025.
Key Components of the Originally Proposed Capital Gains Tax Changes
While the capital gains inclusion rate increase is postponed, the government is still proceeding with separate tax measures, including an increase to the Lifetime Capital Gains Exemption and the introduction of the Canadian Entrepreneurs’ Incentive. These initiatives aim to support small businesses and entrepreneurs, independent of the postponed inclusion rate change.
Capital Gains Inclusion Rate Increase (Effective January 1, 2026):
The capital gains inclusion rate will rise from 50% to 66.67% on capital gains realized above the $250,000 threshold for individuals, and on all capital gains for corporations and most types of trusts. The $250,000 threshold is intended to protect middle-class Canadians from higher taxes on smaller gains, while higher earners and corporations will bear a larger share of the tax burden.
Lifetime Capital Gains Exemption Increase (Effective June 25, 2024):
The government will increase the Lifetime Capital Gains Exemption (LCGE) to $1.25 million for the sale of small business shares, farming, and fishing property. This change aims to support small business owners, ensuring they benefit from a higher tax-free threshold when selling their enterprises.
Canadian Entrepreneurs’ Incentive (Starting 2025):
This new initiative is designed to foster entrepreneurial activity by offering a reduced inclusion rate of 33.33% on a lifetime maximum of $2 million in eligible capital gains. The lifetime maximum will gradually increase by $400,000 each year, reaching $2 million in 2029. This program, combined with the increased LCGE, could provide significant tax relief for entrepreneurs with capital gains from small business sales.
Principal Residence Exemption:
To ensure homeowners do not face a higher tax burden, the Principal Residence Exemption will remain in place. Canadians will continue to be able to sell their homes without incurring capital gains tax, regardless of how much the property has appreciated.
Moving Forward
While the delay offers temporary relief for taxpayers and investors, the fate of the capital gains tax increase remains uncertain. The government has expressed its intent to introduce the necessary legislation, but its passage is not guaranteed. With a federal election set to take place by October 2025, the future of the tax change still remains in question.
In the meantime, the delay gives time for businesses and individuals to consider their financial strategies.