Capital Gains on Hold: Understanding Canada’s Proposed Tax Changes

As we move into a new year, many Canadian business owners and individual taxpayers are left in a state of uncertainty regarding some significant tax proposals—particularly those related to capital gains. With Parliament prorogued until March 24, 2025, a host of tax measures remain in limbo. In this blog post, we break down the proposed capital gains changes and highlight how they might affect you or your business.

1. The Backstory: Prorogation and Uncertain Proposals

On January 6, 2025, Prime Minister Justin Trudeau announced the prorogation of Parliament until March 24, 2025. In Canada, prorogation essentially closes a session of Parliament, meaning any Bills that have not received Royal Assent are terminated. If the government wants to move forward with previously introduced measures, it must reintroduce them in the new session.

This has created confusion about a number of proposed tax changes—including tweaks to capital gains rules. While some proposals were introduced in a Notice of Ways and Means Motion (NWMM), others have never progressed to this stage, adding to the uncertainty.

2. Capital Gains Proposals: Where We Stand

Increase in Capital Gains Inclusion Rate

• Original Proposal: Increase the capital gains inclusion rate from the current 50% to two-thirds (66.67%) for gains arising after a specified date.

• Latest Update: The Department of Finance announced on January 31, 2025, that the effective date for this proposed increase has been deferred to January 1, 2026.

• CRA’s Administrative Approach: The currently enacted 50% inclusion rate stands.

• Tax forms will be updated to reflect the 50% rate in the coming weeks.

• Filing Relief: CRA has indicated it will provide relief for penalties and arrears interest until June 2, 2025 for impacted T1 filers (and May 1, 2025 for impacted T3 filers).
  

For corporations that have already filed using the two-thirds rate, CRA will issue corrective reassessments to revert back to 50%.

Increase to the Lifetime Capital Gains Exemption (LCGE)

• Current LCGE: $971,190 (for qualified small business corporation shares, indexed annually).

• Proposed Increase: The LCGE limit is slated to rise to $1,250,000, effective June 25, 2024.

• CRA’s Position: Despite prorogation, the CRA has indicated it will continue to administer this proposed increase.

3. Why This Matters for Small Businesses and Individuals

Small Business Owners

• Business Sale or Succession: If you are planning to sell your qualifying small business or transition ownership to family members, the higher LCGE could mean more tax savings—assuming the proposal is eventually legislated as planned.

• Deferral of Rate Increase: The delay in raising the inclusion rate may allow entrepreneurs who plan to sell in 2025 to avoid the higher two-thirds rate (which is now deferred to 2026). This could result in substantial tax savings for those closing deals before 2026.

Individual Investors

• Investment Portfolios: A jump in the inclusion rate (even if postponed) could have a significant impact on your after-tax returns.

• Tax Planning: Whether you are considering selling real estate, shares, or other capital assets, staying aware of these shifting rules is crucial. Planning your dispositions can help mitigate unexpected tax costs once (and if) the new rules come into force.

4. Additional Proposed Measures in Limbo

While capital gains have taken centre stage, other significant items remain unlegislated:

• AMT (Alternative Minimum Tax) changes relating to investment counseling fees and flow-through shares.

• Disability supports deduction expansion.

• Accelerated Capital Cost Allowance (CCA) for productivity-enhancing assets and purpose-built rental housing.

• Trust reporting rules modifications.

• Canada carbon rebate enhancements for small businesses and rural supplement eligibility.

• “Canadian entrepreneurs’ incentive” for certain qualifying innovations and business expansions.

Given this uncertain environment, the CRA is administering some of these measures (like the charitable donations extension) but not others (like certain AMT proposals). The best approach is to watch for official guidance and remain flexible in your year-end or transaction planning.

5. Key Takeaways

• Stay Informed: With Parliament prorogued, all previously introduced but unassented Bills are effectively terminated. Keep an eye on legislative updates and CRA announcements to see which measures are reintroduced.

• Leverage the Deferral: If you’re considering selling capital assets in the near future, the current 50% inclusion rate remains until at least January 1, 2026.

• Plan for the LCGE Increase: If you own a small business and plan to sell or transfer shares, the proposed $1,250,000 LCGE could be a powerful tool—should it pass into law as expected.

• Seek Professional Advice: Given the evolving nature of these rules, consult with an accountant or tax professional to navigate the complexities, ensure compliance, and optimize your tax position.

Need Help Navigating Uncertain Tax Rules?

If you have questions about how these proposed changes could impact your business or personal finances, our team at Freeman & Lourenco LLP is here to help. Contact us today to discuss a proactive, tailored tax strategy that aligns with the latest developments.