Amid widespread criticism of the Canada Revenue Agency’s notice that it would administer the capital gains inclusion rate increase before the implementing legislation had received royal assent—and indications from leadership candidates and party leaders that the controversial tax proposal could be cancelled entirely by an incoming government—the federal government today announced a deferral of the measure.

The capital gains inclusion rate increase would now take effect on January 1^st, 2026, instead of the proposed June 25^th, 2024, implementation date. The policy would increase the capital gains inclusion rate from one half to two thirds on all capital gains realized by corporations and most trusts, along with annual capital gains realized by individuals exceeding $250,000.

In its announcement, the government clarified that the Principal Residence Exemption would remain intact, meaning that proceeds from the sale of a home designated as a principal residence may continue to be sheltered from capital gains taxation. This is not a change in policy, but was likely intended to quell speculation that changes to the PRE could be on the table.

Ottawa also indicated an intention to proceed with the increase to the lifetime capital gains exemption—to $1.25 million from the current $1,016,836—on the sale of small business shares and qualified farm and fishing property. The new Canadian Entrepreneurs’ Incentive—which reduces the capital gains inclusion rate to one-third on a lifetime maximum of $2 million in eligible capital gains—would take effect in the 2025 tax year. As originally tabled, this is a graduated proposal. The incentive would increase by $400,000 annually before reaching the $2 million threshold in 2029. The government promises to table implementing legislation “in due course.”

In announcing the capital gains inclusion rate deferral, Finance Minister Dominic LeBlanc said 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. I look forward to further conversations with Canadians on how we can ensure Canada’s fiscal policy encourages robust and sustained economic activity in every region of our country.”

But as we’ve noted in past blogs, LeBlanc and the Liberals may not have the opportunity to have those conversations while still in government. In fact, they may not be able to pass the legislation to implement the capital gains changes at all. Several parliamentary scenarios could still play out: The government could fall on a vote of non-confidence when the House of Commons resumes sitting on March 24^th, 2025. If that occurs, an election would be called, and the winner could either scuttle or pass the legislation and implement the measures outlined in today’s announcement.

So, a great deal of uncertainty remains. But today’s announcement means that for taxpayers, compliance with the proposed capital gains inclusion rate increase for the 2024 tax year is no longer required. Stay tuned for continued updates as the situation develops.

The RH Partners Tax Team

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