Global Daily Tax News, Canada Eases Plans For Capital Gains Tax Hikes, (Feb 3, 2025)

The Canadian Government has decided to defer hikes to the capital gains tax burden.

Under the deferred measure, the portion of individuals' capital gains liable to tax would rise to two-thirds of gains above CAD250,000, up from one-half, and all capital gains realized by corporations and most types of trusts would be fully taxable.

The changes to the capital gains inclusion rate will be implemented from January 1, 2026, rather than from June 25, 2024.

The Government has also announced, to ensure most middle-class Canadians do not pay more tax once the capital gains inclusion rate is increased, the Government will maintain or enhance existing capital gains exemptions while creating a new investment incentive.

The capital gains exemptions being maintained and created would include:

• Maintaining the Principal Residence Exemption, to ensure Canadians do not pay capital gains taxes when selling their home. Any amount they make when they sell their home will remain tax-free;

• A new CAD250,000 Annual Threshold for Canadians, effective January 1, 2026, will be introduced, to ensure individuals earning modest capital gains continue to benefit from the current one-half inclusion rate. Capital gains, including on the sale of a secondary property, such as a cottage, will be eligible for the CAD250,000 annual threshold, meaning a couple selling a cottage with a CAD500,000 capital gain would not pay more tax;

• Increasing the Lifetime Capital Gains Exemption to CAD1.25m, effective June 25, 2024, from the current amount of CAD1,016,836 on the sale of small business shares and farming and fishing property.

The Government has also confirmed plans for the creation of a new Canadian Entrepreneurs' Incentive, announced in the 2024 Budget. This is intended to encourage entrepreneurship by reducing the inclusion rate to one-third on a lifetime maximum of CAD2 million in eligible capital gains. This incentive would take effect starting in the 2025 tax year and the maximum would increase by CAD400,000 each year, reaching CAD2m in 2029. Combined with the new CAD1.25m lifetime capital gains exemption, when this incentive is fully rolled out, entrepreneurs would pay less tax and be better off on capital gains of up to CAD6.25m, the Government said.

The Government intends to legislate for the changes in due course.