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Capital Gains Inclusion Rate Changes in Canada: What’s Happening and Why There’s Uncertainty

Writer's picture: Victoria SmithVictoria Smith

In recent months, the Canadian government has proposed changes to how capital gains are taxed. The most significant change involves the capital gains inclusion rate, which is the percentage of a capital gain that is taxable.


While the Canadian Revenue Agency (CRA) is moving forward with administering these changes for the 2024 tax year, there's still a great deal of uncertainty about whether the proposed changes will actually become law.

capital gains tax

What Is the Capital Gains Inclusion Rate?

In Canada, when an individual sells an investment or property for more than its purchase price, the resulting profit is considered a capital gain. However, only a portion of that gain is taxable, and this portion is determined by the capital gains inclusion rate. Currently, that rate is 50%.


For example, if you sell an asset and make a $10,000 gain, you would only report $5,000 as taxable income under the current system.


The Proposed Changes: A New Rate of 66.67%

The government has proposed an increase to the capital gains inclusion rate, setting it at 66.67% for most capital gains.


For individuals, graduated estates and qualified disability trusts, the first $250,000 of capital gains would still be taxed at the current 50% inclusion rate, but any amount above that threshold would be subject to the higher 66.67% inclusion rate.


The rationale behind this change is to address wealth inequality by ensuring that higher-income individuals and investors contribute more in taxes. Proponents argue that this would make the tax system more equitable by taxing accumulated wealth at a higher rate, rather than primarily taxing income.


The Role of the CRA and Administering the Changes

The Canadian Revenue Agency (CRA) is following its standard practice in administering the proposed changes for the 2024 tax year, which includes the new capital gains inclusion rate and other related measures.


However, this move comes with a level of risk for taxpayers, given that the proposed changes could still be amended or reversed. It’s important to note that while the CRA is proceeding with these measures, the final outcome hinges on whether the government can pass the proposed tax changes through Parliament.


For corporations and trusts with filing deadlines on or before March 3, 2025, the CRA is providing relief from interest related to the capital gains tax changes. This temporary relief means that interest will not accrue on any additional taxes owing due to the capital gains inclusion rate increase until the proposed changes are finalized.


Uncertainty: What Should Canadians Do?

Given the uncertainty surrounding whether the capital gains inclusion rate will actually become law, Canadians have two primary options when it comes to reporting capital gains for the 2024 tax year. Both options come with their own risks and potential costs:


  1. Report Capital Gains Based on the CRA’s Guidance Taxpayers can follow the guidance provided by the CRA and report capital gains at the new 66.67% inclusion rate. However, if the proposed changes are not enacted into law, taxpayers may need to file amended tax returns to correct the reporting and recover any overpayment of taxes. This process can be time-consuming and may result in delays in receiving any potential refunds.


  2. Report Capital Gains Based on Current Law (50% Inclusion Rate) Alternatively, taxpayers can continue to report capital gains under the current tax rules, which include a 50% inclusion rate for all capital gains. If the proposed changes are enacted, taxpayers would need to file amended returns to reflect the new, higher inclusion rate and pay any additional taxes owed. Furthermore, they would be subject to arrears interest charges on any additional taxes owing unless further relief is granted by the CRA.


What Does This Mean for Canadians?

While the tax policy changes have yet to be finalized, Canadian taxpayers need to carefully consider their reporting options for the 2024 tax year. If you are planning to make large capital gains in the near future, you should consult with a tax professional to determine the best course of action. Keeping up-to-date with the evolving tax landscape is crucial for making the right decisions for your financial future.


If the proposed changes do become law, it could mean a significant increase in tax liabilities for individuals who earn substantial capital gains. On the other hand, if the changes do not pass, taxpayers who followed the CRA's guidance could face the hassle of correcting their returns to recover overpaid taxes.


Conclusion: Stay Prepared and Monitor the Situation

For now, the proposed changes to the capital gains inclusion rate remain uncertain, with both political and economic factors influencing the likelihood of their passage. Canadians need to stay informed and remain flexible in their tax planning. Whether you decide to report capital gains based on the new guidance or under the current law, careful attention to detail will be crucial in avoiding costly mistakes and ensuring compliance with Canadian tax regulations.


As the situation develops, it’s essential to consult with a tax professional who can guide you through these uncertain times and help you navigate the potential changes to the tax system.

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