By: Florence Marino B.A., LL.B., TEP | Vice President, Tax & Estate Planning
Here is our take on the recent political and administrative events that have unfolded to start 2025 focusing on the capital gains inclusion rate change that is not yet law.
Political
Prime Minister Justin Trudeau announced on January 6, 2025, that he will step down when a new liberal party leader is in place. Parliament has been prorogued until March 24. This means that any outstanding government bills that have not yet received Royal Assent will “die on the order paper.” No tax bills were in existence. A Notice of Ways and Means Motion (NWMM) was tabled on September 23, 2024, containing the capital gains inclusion rate change but no bill was introduced.
The opposition parties are keen to have a non-confidence vote which can only happen once the Parliament is back. That will more than likely trigger a shorter timeframe until the next election scheduled for October 20, 2025. This climate would make it unlikely that Parliament would reintroduce the inclusion rate changes as a bill at that time. However, the possibility remains that the NDP could support a reintroduction and passage of the inclusion rate measures prior to a confidence vote.
Administratively in the meantime
On January 7, the CRA stated it would be administering the changes to the capital gains inclusion rate effective June 25, 2024, based on the proposals included in the NWMM. See: Businesses: Here are the top changes that will affect business taxes in 2025 – Canada.ca
What this means for 2024 income tax filing
The proposals are not yet law and may never become law. (For a discussion of the proposals see: Capital gains inclusion rate details – Thinking about the long term – Tompkins Insurance). Do taxpayers file based on CRA’s guidance and pay tax based on a 2/3 inclusion rate (where applicable) or file based on a ½ inclusion rate? If they do the latter, the exposure is to interest if the law ends up getting passed by Parliament when it returns or by any new government after an election.
Any inclusion rate change (or not) will impact many tax calculations – capital dividend account (CDA) balances, reductions required under the stop-loss rule in subsection 112(3.2) of the Act, capital loss carry forwards – to name a few. Taxpayers may end up maintaining two sets of calculations so they can pivot when things become clear.
Other measures of interest that are not yet law
Also in limbo are measures that have been announced or that are at various stages of development. These include:
- Beneficial rules regarding subsection 164(6) redemption and capital loss carry back planning extending the timeframe for doing this type of post-mortem tax planning (see: Technical amendment expands the time frame for post-mortem capital loss carry-back planning – Tompkins Insurance);
- Canadian Entrepreneurs Incentive (see: Legislative loose ends – Tompkins Insurance);
- Other proposed technical amendments for graduated rate estates that would exempt post-mortem pipeline planning involving non-resident beneficiaries from the trust look through rules in paragraph 212.1(6)(b) that would otherwise bring on dividend treatment as opposed to capital gains treatment;
- The recognition of charitable gifts for the 2024 tax year for gifts made until February 28, 2025 announced on December 30, 2024.
- The list goes on.
What about insurance?
In our view, the opportunity for the use of life insurance remains the same as it always was. Life insurance to fund estate taxes (at whatever inclusion rate) is where we focus. This opportunity over the past number of years has grown due to higher business valuations and the corporate tax landscape even without the change to the capital gains inclusion rate. If this change does not proceed, we are still in a very favourable environment for life insurance. These trends are outlined in our original TOMPKINSights: Looking back and looking forward – Tompkins Insurance
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.
Should you wish to discuss this or any other TOMPKINSights article, please contact
florence@tompkinsinsurance.com
