The federal government is delaying plans to raise the inclusion rate on capital gains, offering a degree of clarity on the legislation stuck in limbo that was causing some confusion for the upcoming tax season.
Finance Minister Dominic LeBlanc announced Friday that the Liberals will not implement a planned hike to the capital gains inclusion rate until Jan. 1, 2026, pushing back the original date of June 25, 2024.
The Liberals had initially introduced the proposed changes to capital gains taxes in the 2024 federal budget this past spring.
Capital gains are proceeds from the sale of an asset, like a stock or property. The Liberals had pitched to raise the inclusion rate or the taxable portion of capital gains sold in a year to 66.7 per cent, up from 50 per cent.
The changes would apply to all gains realized by businesses and many trusts, as well as any capital gains earned above $250,000 in a year for individual Canadians.
The proposal got pushback from some farmers, doctors and other professional groups amid complaints it could affect succession and retirement planning as well as productivity in Canada.
While the sale of primary residences would remain exempt from capital gains taxes, Canadian families selling a secondary property like a cottage could face the higher inclusion rate.
Though the Liberals had introduced the proposed changes in a notice of ways and means motion last year, the legislation formalizing the tax change was never passed through Parliament.
The tax change was put in limbo when Prime Minister Justin Trudeau prorogued Parliament earlier this month, calling into question whether the higher inclusion rate would ever be made law.
The capital gains changes have been politically contentious, with Conservative Leader Pierre Poilievre vowing to scrap the planned changes if he forms government after the next election. Even Liberal leadership contender and former finance minister Chrystia Freeland, who introduced the proposal in the budget and defended it against criticism, has indicated she would nix the changes if she became prime minister.
With a federal election set for no later than October 2025, the Liberals would have to find a way to re-introduce and pass the capital gains measures after Parliament returns on March 24 but before voters head to the polls to keep the tax changes on the books. Otherwise, the legislation would be effectively dead.
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But the Canada Revenue Agency had said it would follow a long-standing precedent and administer the change anyway in the upcoming tax season based on the proposed legislation.
That put taxpayers in a tricky position. Either they could file their taxes based on the higher inclusion rate, potentially paying a higher amount to the CRA and having to seek a refund, or they could use the old rate and potentially face a penalty for underpaying.
“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,” LeBlanc said in a statement. “Given the current context, our government felt that it was the responsible thing to do.”
The CRA confirmed in a separate statement on Friday that it will now revert to administering capital gains proceeds based on the current inclusion rate of one-half for the upcoming tax season.
The agency said it will issue new forms with the existing inclusion rate for individuals and trusts in the coming weeks.
It will also offer affected individuals a few weeks free from late-filing penalties or interest on arrears “to provide additional time for taxpayers reporting capital dispositions to meet their tax filing obligations.” That grace period will stretch until June 2 for affected individuals filing T1 tax returns and until May 1 for those who are impacted and filing a T3 return for a trust.
For the “small number of corporations” who already filed based on the previously proposed capital gains changes, “the CRA will coordinate corrective reassessments to reverse the application of the two-thirds inclusion rate.”
“Now that the government has communicated its intentions regarding the proposed capital gains inclusion rate, we are working as quickly as we can to adjust our systems and forms so that taxpayers who need to report capital dispositions can do so as early as possible,” the agency said.
Business groups cheer clarity
The decision to delay the capital gains changes to next year was met with approval from the Canadian Federation of Independent Business (CFIB) on Friday.
“This will be welcome news to many small business owners who were facing higher taxes from a tax change that was proceeding despite the lack of any legislation from Parliament,” said CFIB president Dan Kelly in a statement.
The Canadian Chamber of Commerce similarly lauded the clarity offered by the deferral, but maintained that plans for the higher inclusion rate should be scrapped entirely.
Conservative MPs Jasraj Singh Hallan and Adam Chambers said in a statement released Friday that the postponed changes offer only “a temporary reprieve for doctors, farmers, small businesses,
entrepreneurs and home builders.”
They also said the announcement that the CRA would continue to administer the changes despite legislation not being passed created “months of uncertainty and a tax-filing nightmare for working Canadians across our country.”
A Conservative filibuster stalled activity in Parliament through much of the fall, preventing the Liberals from passing much of their legislative agenda.
The decision to delay the capital gains tax changes will also have an impact on the government’s balance sheets, as budget projections included in the fall economic statement relied on revenue collected by the higher inclusion rate.
Global News has reached out to LeBlanc’s office to ask how the delay will affect the federal government’s fiscal position.
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