The federal government announced in the February 2024 budget that the inclusion rate would rise to 66.7% (two-thirds) for capital gains exceeding $250,000 annually for individuals, as well as for corporations and trusts. However, in January 2025, the government deferred this change to January 1, 2026, to allow more time for adjustments and to ensure middle-class Canadians are not disproportionately affected.
On the dissolution of Parliament for the 2025 Federal Election, this section of the budget essentially “died on the table” as it was never passed into legislation. Prime Minister Carney subsequently stated that the Liberal Party would not reintroduce this proposed change.
In Canada, capital gains tax applies when you sell an asset or investment for more than you originally paid for it. Here’s a breakdown:
- Taxable Amount: Only 50% of your capital gains are taxable. For example, if you earn $10,000 in capital gains, you’ll only pay tax on $5,000.
- Tax Rate: The taxable portion is added to your income and taxed at your marginal tax rate, which depends on your total income and province of residence.
- Exemptions: Some assets, like your principal residence, are exempt from capital gains tax. Additionally, capital losses can be used to offset capital gains, reducing your taxable amount.
In Canada, the Lifetime Capital Gains Exemption (LCGE) allows eligible individuals to exclude a portion of their capital gains from taxable income when disposing of qualified property. For 2024, the LCGE limits are as follows:
- Period 1 (January 1 to June 24, 2024): The LCGE is set at $1,016,836, meaning half of this amount ($508,418) is the cumulative capital gains deduction limit for this period.
- Period 2 (June 25 to December 31, 2024): The LCGE increases to $1,250,000, with half of this amount ($625,000) being the deduction limit.
This exemption applies to qualified small business corporation shares (QSBCS) and qualified farm or fishing property (QFFP). For these types of property, only half of the capital gain is included in taxable income, aligning with the current capital gains inclusion rate of 50%.
Let me know if you’d like further clarification or details!
What’s Next? Federal Election 2025
Election Proposals as of March 31, 2025
Liberal Party: Proposes reducing the lowest income tax bracket rate from 15% to 14%, benefiting middle- and low-income Canadians. They’ve pledged to retain the lifetime capital gains exemption for small business shares and farming/fishing equipment of $1.25 million. On investments, they aim to expand access to tax-free savings accounts (TFSAs) by increasing the annual contribution limit to $8,000.
Conservative Party: Plans to cut the lowest income tax bracket rate to 12.75% from 15%, phased over two years. On capital gains, they propose a tax deferral for reinvested gains, encouraging domestic investment. For TFSAs, they promise a top-up allowing Canadians to contribute an additional $5,000 annually, provided the funds are invested in Canadian companies.
New Democratic Party (NDP): Suggests raising the Basic Personal Amount (BPA) to $19,500 from the 2025 amount of $16,129, meaning Canadians earning below this threshold wouldn’t pay federal income tax. They haven’t announced specific changes to capital gains taxes or TFSAs.
Green Party: Proposes an even higher Basic Personal Amount (BPA) threshold of $40,000, aiming to exempt more low-income earners from federal income tax. No specific capital gains or TFSA proposals have been highlighted.
As Canada approaches the 2025 Federal Election, the future of capital gains taxation remains uncertain. While the previously proposed increase to the inclusion rate has been shelved, it may resurface depending on the outcome of the election and the priorities of the incoming government. For now, the inclusion rate remains at 50%, and the Lifetime Capital Gains Exemption continues to provide significant tax relief for eligible business owners and farmers.
Canadians with investment income or plans to dispose of significant assets should stay informed and consult their tax advisors to assess how evolving tax policies could impact their financial strategies moving forward.
Article originally posted at The Accounting Place – https://theaccountingplace.ca/taxes/capital-gains-taxation-2024-and-beyond/ For further information regarding your personal situation, please contact your Financial Advisor.