The uncertain destiny of capital gains tax changes

The Budget 2024 proposal

In Federal Budget 2024, the Department of Finance proposed significant changes to the capital gains inclusion rate, effective June 25, 2024. Under the current rules, a capital gain is subject to a 50% inclusion rate. Under the proposed changes, capital gains realized in the period from January 1, 2024, to June 24, 2024, are subject to a 50% inclusion rate, whereas, from June 25, 2024, onward, only the first $250,000 in capital gains realized by individual investors are subject to a 50% inclusion rate. Any capital gains realised in excess of the $250,000 threshold are subject to an inclusion rate of 66.67%. Capital gains realized prior to June 25, 2024, would be subject to a 50% inclusion rate irrespective of the amount of the capital gains. This proposed change would apply both to capital gains realized from the disposition of shares/units of a mutual fund or exchange-traded fund (ETF) as well as capital gains distributions received from a mutual fund or ETF.

For entities such as corporations and trusts (except for certain limited types of trusts), there is no $250,000 threshold available, and all capital gains earned on June 25, 2024, and onwards would have an inclusion rate of 66.67%. With that said, capital gains distributions flowed through a mutual fund trust or mutual fund corporation to an individual investor are taxed in the investor’s hands. As a result, individual investors who receive capital gains distributions through a mutual fund benefit from the 50% inclusion rate up to $250,000, even after June 24, 2024.

Recent political developments (as of January 2025)

On January 6, 2025, Justin Trudeau announced that he intends to resign as Prime Minister once a successor to the Liberal Party has been chosen. He also announced that the Parliament of Canada would be prorogued in the interim, with the next parliamentary session scheduled for March 24, 2025. When Parliament is prorogued, all draft legislation under review by the House of Commons and the Senate is scrapped and must be reintroduced as a new proposal when Parliament reconvenes.

Because the proposed increases to the capital gains inclusion rate were only draft legislation at the time of the prorogation, it has effectively been ‘killed’ from a legislative standpoint as of the time of this writing, with the likelihood of it being reintroduced depending on the political future of the ruling party. The Conservative Party has expressly stated that it does not support the proposed capital gains tax changes. 

What should taxpayers do?

Given the tenuous status of the proposal following the prorogation of Parliament, many tax pundits assumed that the Canada Revenue Agency (CRA) would no longer expect taxpayers to follow the proposed changes when filing for 2024. However, the CRA has since stated its intention to enforce the provisions contained in the proposal and will continue to do so unless the motion is not reintroduced when Parliament resumes at the end of March.

For now, taxpayers are generally expected to file as though the capital gains proposals were law unless the CRA issues updated instructions that reverse its current positioning due to the uniqueness of our current political environment and the contentiousness of this tax proposal. To aid in the tax reporting of the proposed measures, the 2024 T3, T5, and T5008 tax slips will likely contain separate boxes to distinguish between capital gains realized on or before June 24, 2024, to which the 50% inclusion rules apply, from those realized on or after June 25, 2024, to which the new proposal rule intend to apply. Changes to tax slips are largely dependent on each financial institution's ability to adopt the changes in time for the tax reporting period.

The outcome of the capital gains changes hinges on a highly uncertain political landscape at this time. We continue to monitor any developments and will provide updates as needed.