By: Florence Marino B.A., LL.B., TEP | Vice President, Tax & Estate Planning
On January 31, 2025, the Department of Finance announced the deferral of the implementation of proposed changes to the capital gains inclusion rate to January 1, 2026. Also, the Canada Revenue Agency followed suit and confirmed it will administer based on the current law at a 50% inclusion rate.
A few details
The announcement included a commitment to implement an increase to the lifetime capital gains exemption with an effective date of June 25, 2024, and indexation in 2026. It also committed to implementing the Canadian Entrepreneur’s Incentive detailed in August 12, 2024 draft legislation.
The announcement did not mention, among others, proposed changes to the stop-loss rule for estates (for a discussion see: Capital gains inclusion rate details – Thinking about the long term – Tompkins Insurance), employee deductions under the stock option rules and withholding requirements related to the disposition of taxable Canadian property – all adjacent rules relating to the capital gains inclusion rate change. In subsequent correspondence, Finance confirmed: “that the announced deferral applies to the implementation of all of the consequential changes that would be made to reflect the increased inclusion rate in other areas of the tax system, including but not limited to: net capital losses, employee stock option deduction, allowable business investment losses and capital gains reserves.”
Some current impacts
For those individuals and trusts who triggered gains in 2024, whether in anticipation of the inclusion rate change or afterwards (thinking that alternative minimum tax (AMT) would not be a factor), the new AMT rules could result in more tax owing in 2024 since these measures did become law (Bill C-69 Royal Assent June 20, 2024). For a review of these rules see: Alternative minimum tax – Where are we now? – Tompkins Insurance. (There were a few technical tweaks related to flow through shares and investment counsel fees under the AMT proposed in the August 12, 2024 draft legislation that have not been implemented yet but the new regime is mainly in effect).
Some taxpayers implemented internal reorganizations to allow flexibility to realize capital gains prior to June 25, 2024. All done in vain.
Longer term outlook
The probability of the change in the capital gains inclusion rate is now probably less than 5%. We have seen in the news that both Liberal leadership frontrunners had publicly stated that they would not proceed with it, as such, this change is highly unlikely.
If this fiasco did nothing else, it heightened the awareness of business owners to their growing capital gains tax liabilities arising from growth in value of their business and corporate holdings. Whatever the inclusion rate, the use of life insurance to fund estate taxes should remain a focus.
FOOTNOTE:
This publication is protected by copyright. Tompkins Insurance is not engaged in rendering tax or legal advice. TOMPKINSights contains a general discussion of certain tax and legal developments and should not be construed as tax or legal advice.
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