Canada Revenue Agency (CRA’s) Administration of Proposed Capital Gains Taxation Changes: An Update

CRA Challenged in Court on the Proposed Capital Gain Inclusion Rate

Legal challenges against the Canada Revenue Agency (CRA) escalated in January 2025 with two separate lawsuits questioning its authority to enforce the federal government’s proposed capital gains tax increase. The contentious measure, set to apply retroactively from June 25, 2024, was introduced in the April 2024 federal budget and proposed raising the capital gains inclusion rate from 50% to 66.67% for gains exceeding $250,000.

Despite the lack of formal legislation, the CRA has moved forward with implementing the changes, stating on its website, “notwithstanding Parliament is prorogued, the CRA will continue to administer the proposed capital gains legislation.” This decision has sparked outrage and protests from various stakeholder groups, prompting individual taxpayers to file lawsuits against the agency.

On January 31, 2025, the Department of Finance announced that it would introduce legislation in Parliament to implement the proposed changes to the capital gains inclusion rate, with a revised effective date of January 1, 2026. Under this proposal, for dispositions occurring on or after that date, the inclusion rate will increase from one-half to two-thirds for capital gains exceeding $250,000 annually for individuals and for all capital gains realized by corporations and most trusts.

In response, the CRA has reverted to administering the current capital gains inclusion rate of one-half. This means that all capital gains realized before January 1, 2026, will continue to be subject to the existing one-half inclusion rate unless an exemption applies.

The announcement also confirmed that the proposed increase to the Lifetime Capital Gains Exemption (LCGE) limit to $1.25 million remains unchanged. This measure, introduced in the Notice of Ways and Means Motion (NWMM) tabled in Parliament on September 23, 2024, will take effect for dispositions occurring on or after June 25, 2024, with indexation resuming in 2026. The CRA will continue to administer this change accordingly.

Individuals and Trusts – Proposed Changes Effective January 1, 2026

With the revised effective date, the CRA will reissue tax forms reflecting the currently enacted one-half inclusion rate in the coming weeks.

To assist impacted taxpayers, the CRA will provide relief from late-filing penalties and arrears interest until:

• June 2, 2025, for T1 Individual filers
• May 1, 2025, for T3 Trust filers

The CRA is working to update its systems and forms promptly to enable taxpayers to report capital dispositions as early as possible.

Corporations – Proposed Changes Effective January 1, 2026

As the capital gains inclusion rate change is now proposed to take effect on January 1, 2026, corporations may continue to use existing forms and tax software to file using the one-half inclusion rate until further notice.

For corporations that filed based on the NWMM tabled on September 23, 2024, following previous CRA guidance, the agency will coordinate corrective reassessments to reverse the application of the two-thirds inclusion rate.

Pro tax tips – the 50% capital gain inclusion rate still applies before January 1, 2026

Thanks to this latest update from the CRA regarding the capital gain inclusion rate, taxpayers (individuals, trusts and corporations) can still report their capital gains based on the 50% inclusion rate.

The CRA’s decision to delay the capital gains changes to 2026 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.

In comparison, the CRA’s previous position 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 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. Given that an election is expected in 2025, it is entirely likely that these proposed changes will never be enacted by Parliament and implemented.

FAQ:

What’s the current capital gain inclusion rate?

The current capital gain inclusion rate remains at 50%. Although the CRA previously took the position that the proposed include rate of 66.67% from the April 2024 federal budget would come into force from June 25, 2024, it has updated its position by postponing the new inclusion rate to take effect on January 1, 2026. Given that an election is expected in 2025, it is entirely likely that these proposed changes will never be enacted by Parliament and implemented.

How are capital losses impacted by the CRA’s updated position?

Capital losses are impacted in the same way as capital gains. The CRA allows taxpayers to carry those losses back up to 3 years or forward indefinitely to apply against any capital gains income.

Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.