Posted on February 26th, 2025 in Domestic Tax
Budget 2024 proposed an increase in the capital gains inclusion rate (CGIR) from 1/2 to 2/3. However, with the recent deferral to January 1, 2026, coupled with the slow-moving legislative process and upcoming federal elections, taxpayers face significant uncertainty. This makes proactive tax planning more essential than ever.
In response to this uncertainty, the Canada Revenue Agency (CRA) has provided updates and relief measures for taxpayers, including maintaining specific reporting periods for capital gains, waiving late-filing penalties and interest until mid-2025, and extending deadlines for filing information returns.
Taxpayers should explore various strategies to navigate these changes, such as realizing gains early, leveraging exemptions, and adjusting investment strategies to optimize their tax position. Staying informed and adaptable is crucial as legislative developments unfold.
The proposed changes to the capital gains inclusion rate (CGIR) continue to create uncertainty for taxpayers and businesses alike. While the Department of Finance (DOF) has deferred the implementation of increased CGIR from 1/2 to 2/3 to Jan. 1, 2026, no further legislative updates have been introduced, leaving taxpayers in a position of ambiguity.
Since its announcement in the 2024 federal budget, the implementation of increased CGIR has been moving at a slow pace, leading to speculation about whether the increase will be implemented as planned or postponed further. With Parliament set to resume soon, there is still no guarantee that clarity will come swiftly. Given the upcoming federal elections and potential shifts in government policy, it is possible that there will be no definitive answer for several months. In this evolving landscape, taxpayers must stay proactive in their planning, assessing potential outcomes and considering various strategies to mitigate risks and optimize their tax positions.
The Canada Revenue Agency (CRA) has recently provided clarifications and relief measures for taxpayers and tax preparers dealing with the ongoing uncertainty surrounding capital gains and other compliance requirements:
The CRA is maintaining Period 1 (pre-June 25, 2024) and Period 2 (on or after June 25, 2024) reporting on T1 and T3 schedules to align with tax slips already issued or filed, despite reverting to the current CGIR of 1/2.
The updated Schedule 3 for 2024 T1 tax returns maintains a breakdown of dispositions into pre- and post-June 25, 2024, periods to align with tax slip disclosures. Therefore, while issuing the tax slips, the taxpayers must still bifurcate the capital gains into both periods and hence, must be reported accordingly on the T1 and T3 income tax returns. This bifurcation is important from a lifetime capital gains exemption (LCGE) perspective, as only dispositions on or after June 25, 2024, are eligible for the enhanced LCGE of $1,250,000 (up from $1,016,836).
Furthermore, the CRA clarified that taxpayers should not use lines 12701 and 25999, even though they remain on the return, as the 1/2 CGIR applies for all of 2024.
To mirror the increased CGIR, the government also proposed reducing the employee stock options plan (ESOP) deduction from 1/2 to 1/3. However, with the deferral in the implementation of increased CGIR, the CRA clarified that if the taxpayer’s T4 slip includes amounts in boxes 91 and 92 for ESOP deductions after June 24, 2024, at a 1/3 rate, they will need to enter the amounts from the T4 slip on line 24900 of the T1 return. In addition, taxpayers must claim the additional ESOP deduction on line 24901 in order to claim a total deduction of up to 1/2 of the ESOP benefits received in the year. Taxpayers can use the Federal Worksheet to calculate the additional ESOP deduction.
The CRA has clarified that late-filing penalties and arrears interest will be waived until June 2, 2025, for impacted T1 individual filers and until May 1, 2025, for impacted T3 trust filers. In addition, the CRA also clarified that this relief applies to both the filing of T3 slips and the T3 income tax return.
Importantly, however, the CRA has revoked relief for corporations with a filing due date on or before March 3, 2025, that was previously announced. The current CRA website for corporate income tax returns no longer mentions corporations being eligible for the relief when compared to an archived version of the website from January 31, 2025.
The CRA announced that late-filing penalties for information returns (due February 28, 2025) will be waived if filed by March 7, 2025. For T4PS and T5008 slips, the relief has been extended to March 17, 2025, to allow taxpayers additional time to recalculate the amounts due to the deferred implementation of increased CGIR. However, Revenue Quebec has not announced any such relief yet.
In addition, CRA clarified that in case an information return is filed after the extended due date, it will incur a late filing penalty based on its original due date and not the extended due date. Therefore, taxpayers should make all efforts to ensure the information return is filed by the extended due date.
Given the uncertainty surrounding the CGIR, taxpayers who defer planning in anticipation of a final conclusion may find themselves in a disadvantageous position. If the government ultimately moves forward with the proposed increase, those who did not act proactively may face higher tax liabilities than if they had engaged in early planning. Therefore, taxpayers should assess their financial situations and engage in proactive tax planning to optimize their tax positions. Some key considerations are listed below:
The deferral provides additional time for taxpayers to reconsider their tax planning strategies. Taxpayers can use this period to review their investment portfolio to identify any assets with significant unrealized capital gain and decide whether it makes sense to realize gains before the new rate takes effect on January 1, 2026. This could help taxpayers to take advantage of the current lower CGIR. However, this strategy should be weighed against individual circumstances, market conditions and potential future legislative changes.
While the implementation of increased CGIR has been deferred, various exemptions such as the principal residence exemption (PRE), the enhanced LCGE and the Canadian entrepreneurs’ incentive (CEI) are intact. Therefore, the taxpayers can access these exemptions to mitigate the taxes. The proposed increase in the LCGE to $1.25 million for qualified small business corporation shares and farming and fishing property provides a valuable tax planning opportunity. On the other hand, the newly introduced CEI lowers the inclusion rate for certain business owners selling their businesses. Individuals considering the sale of eligible assets should evaluate whether they can take advantage of these exemptions before any further tax policy shifts occur.
Taxpayers can explore income-splitting strategies with family members in lower tax brackets to distribute capital gains more tax-efficiently. This may involve gifting or selling assets to family members. However, taxpayers need to stay mindful of attribution rules, tax on split income rules and other negative tax considerations that may arise.
Taxpayers who are reluctant to realize gains may explore structuring options to defer capital gains or spread them over multiple years. Techniques such as estate freezes, the use of trusts, and corporate reorganizations may help mitigate the tax impact of a future CGIR increase.
Investors should re-evaluate their portfolios in light of the proposed changes and consider tax-efficient investment options in tax-sheltered accounts such as tax-free savings accounts (TFSAs) and registered retirement savings plans (RRSPs), to minimize taxable gains. Taxpayers must also diversify their investment portfolios to spread risk and potentially reduce the impact of higher CGIR.
The proposed increase to the CGIR will lead to higher taxes on death arising due to the deemed disposition of assets at fair market value (FMV). Hence, individuals should revisit existing estate plans in light of the higher CGIR to account for the increased tax liability upon death. In addition, taxpayers who have implemented an estate freeze should re-evaluate its effectiveness.
The draft rules provided safe harbour provisions for individuals to protect capital gains below the annual threshold of $250,000 from the higher CGIR. Corporations holding assets (e.g., marketable securities, real estate and/or shares) may consider transferring such assets to their shareholders to crystallize accrued capital gains before the proposed effective date. By doing so, shareholders would be able to shelter future capital gains of up to $250,000 when they eventually sell the assets.
Taxpayers can crystallize existing accrued capital gains by electing a rollover under section 85 of the Income Tax Act, thereby potentially benefiting from the lower CGIR.
Generally, under subsection 85(1) rollovers, a taxpayer can transfer eligible property to a taxable Canadian corporation where an election is filed. The taxpayer has the option to elect an amount to be deemed as proceeds of disposition for each transferred property. This elected amount may equal or exceed the adjusted cost base (ACB) or undepreciated capital cost (UCC) of the property but must not exceed its FMV.
Since this election is due when the earliest tax return for that particular year is due, taxpayers could elect at the property’s maximum FMV to crystallize the capital gains at a lower rate if the legislation proceeds as planned. Alternatively, taxpayers have the option to elect the transfer to occur at the ACB/UCC of the property, facilitating a fully tax-deferred transfer without triggering capital gains at the time of transfer. This strategy provides the ability and time to the taxpayer to elect a partial or no capital gain depending on where the legislation ends up.
As the value of net capital losses from previous years will be adjusted to align with the applicable inclusion rate, taxpayers can consider deferring the capital losses carried forward because they will be more valuable when used against the capital gains realized at a higher rate.
As Parliament resumes and the political landscape unfolds, taxpayers should closely monitor developments. The federal election will play a crucial role in determining the fate of the proposed CGIR increase. A change in government could lead to amendments, delays or even the complete withdrawal of the proposal. Furthermore, global economic conditions, including tariffs, trade tensions, inflation rates, and economic growth in major economies, can influence Canada’s economic stability and policy decisions. Therefore, predicting the final form of the CGIR becomes complex.
Regardless of the outcome, taxpayers must remain adaptable. Waiting until the last minute to make critical tax decisions could result in lost opportunities or higher tax liabilities. The road ahead remains uncertain, but taxpayers can turn ambiguity into opportunity with the right planning.
This article was written by Daniel Mahne, Chetna Thapar and originally appeared on 2025-02-26. Reprinted with permission from RSM Canada LLP.
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The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM Canada LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
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