Canada Defers Capital Gains Tax Increase to 2026: What You Need to Know

In a recent announcement, the Government of Canada, declared that it is deferring the planned increase in the capital gains inclusion rate. Originally set to take effect on June 25, 2024, the increase will now be implemented on January 1, 2026.

The capital gains inclusion rate determines the portion of capital gains that is taxable. This change was originally scheduled to take effect June 25, 2024 and would result in an increase in the inclusion rate on capital gains from one-half to two-thirds. To illustrate, this change would have the following impacts both before and after the change (using the highest marginal individual tax rate for residents of Alberta in 2025):

Expected impact of capital gains rate inclusion rate increase on $100,000 of capital gains. Uses highest marginal tax rate for an individual in Alberta.

To ensure that middle-class Canadians are not adversely affected by this change, the government has outlined several measures:

• Principal Residence Exemption: Canadians will continue to be exempt from capital gains taxes when selling their primary home, ensuring that any profit from such a sale remains tax-free.

  
  

• $250,000 Annual Threshold: Effective January 1, 2026, individuals earning modest capital gains will benefit from the current one-half inclusion rate on gains up to $250,000 annually. This includes gains from the sale of secondary properties, such as cottages. For instance, a couple selling a cottage with a $500,000 capital gain would not face additional taxes due to this threshold.

  
  

• Lifetime Capital Gains Exemption Increase: Starting June 25, 2024, the exemption was increased from $1,016,836 to $1.25 million for the sale of small business shares and farming and fishing properties.

  
  

• Canadian Entrepreneurs’ Incentive: To encourage entrepreneurship, a new incentive will reduce the inclusion rate to one-third on a lifetime maximum of $2 million in eligible capital gains. This incentive will begin in the 2025 tax year, with the maximum increasing by $400,000 each year, reaching $2 million in 2029.

  
  

It's important to note that while the increase in the capital gains inclusion rate has been deferred, the enhancements to the Lifetime Capital Gains Exemption and the introduction of the Canadian Entrepreneurs’ Incentive will proceed as scheduled.

As the government prepares to introduce legislation to effect these changes, Canadians are encouraged to stay informed and consult with financial advisors to understand how these adjustments may impact their financial planning. Please feel free to reach out to KLV Accounting at 403-679-3772 or info@klvaccounting.ca for more information.