Capital Gain Reversal: Much Ado About Nothing
On Friday, the Honourable Dominic LeBlanc, Minister of Finance and Intergovernmental Affairs, announced that the federal government is deferring—from June 25, 2024 to January 1, 2026—the date on which the capital gains inclusion rate would increase from one-half to two-thirds on capital gains realized annually above $250,000 by individuals and on all capital gains realized by corporations and most types of trusts. The capital gains inclusion rate represents the portion of capital gains that is taxable.
The Minister of Finance stated that:
“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 context, our government felt that it was the responsible thing to do.”
The element of certainty is critical for businesses and investments who, because of this proposed rule, have not been sure how much tax their business and investment transactions will trigger. Now they can do business and tax planning with more confidence. The tax returns can be filed this year with ½ capital gain inclusion rate.
CRA will grant relief in respect of late filing penalties and arrears interest until June 2, 2025, for impacted T1 individual filers and until May 1, 2025, for impacted T3 Trust filers. This is designed to provide additional time to taxpayers with capital gains to meet their tax filing obligations. As for the corporations, they can continue to use existing forms and tax software to file using ½ inclusion rate until further notice. For the small number of corporations that followed CRA’s guidance to file with 2/3rd inclusion rate, CRA will coordinate corrective reassessments to reverse the application of the two-thirds inclusion rate.
The postponement of the proposal injects much needed certainty in the economy that is already under a lot of pressure given the impending US tariffs on Canada. The proposal was originally introduced when Chrystia Freeland, who is currently the leadership candidate of Liberal party, was the finance minister. It didn’t bode well for this proposal when Chrystia recently floated the idea of scrapping the increase in capital gain inclusion rate during her ongoing leadership campaign.
The postponement of this proposal is arguably not only good for business and real estate investment but should also help maintain international competitiveness of Canada. Many business owners, especially those involved in small and medium-sized enterprises, voiced concerns that the change would negatively affect them, making it more difficult to reinvest profits or transfer ownership of their businesses. Another argument against this proposal was that increasing the capital gains tax would disproportionately impact middle-class, who often make investments in real estate and stocks for retirement savings. Many have been making the case that the government should realize its policy goals through alternative methods.
The postponement of this decision might be the first step towards its permanent demise as the Conservative party, which is leading the polls have actively spoken again this proposal. Whatever the economic and political costs or benefits, Friday’s announcement is good news for businesses and investors who have been struggling with the potential retroactive impact of this proposal.
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