Tax alert: Continued uncertainty amidst looming tax filing season — impact of proposed capital gain tax changes

As you are aware on January 6, 2025, the Governor General accepted the Prime Minister’s request to prorogue Parliament until March 24, 2025. This decision has created significant uncertainty for Canadians and Canadian businesses as to how outstanding tax measures, such as the capital gain tax changes, should be treated for the looming tax filing season. This uncertainty is not conducive to making business decisions with predictable economic outcomes.

Canada Revenue Agency guidance

The Canada Revenue Agency (CRA) has specifically stated that it will follow standard practice and administer the proposed changes to the capital gains inclusion rate and related measures for the 2024 tax year.

What does this mean for taxpayers:

Two clear options are available however, both come with uncertainty and potential costs to the taxpayer:

1. Report capital gains based on the guidance provided by the CRA. In the event the proposed tax changes are not enacted, taxpayers will need to file amended tax returns to correct the reporting and recover any overpayment of tax.
2. Report capital gains based on the current enacted tax law (i.e. 50 percent inclusion rate). In the event the proposed tax changes are enacted, taxpayers will need to file amended tax returns to correct the reporting and pay additional taxes owing. There will be arrears interest charges on any additional taxes owing if further relief is not granted.

Please note:

1. CRA is providing relief from interest for corporations and trusts with filing deadlines on or before March 3, 2025 (specifically related to the capital gain tax changes).
2. CRA has stated that they will cease to administer the proposed capital gains changes if no bill is passed upon the resumption of Parliament, or if the government signals its intent to not proceed with the proposed measure.

What are the proposed changes?     

Budget 2024 proposed that the current capital gains inclusion rate of 50 percent would be increased as of June 25, 2024, to two-thirds, or 66.67 percent. The applicable rate for a taxation year that includes this date will be either 50 percent, 66.67 percent, or a blended rate if capital gains/losses are realized in the two periods both before and after this date.

For individuals, graduated rate estates (GREs), and qualified disability trusts, the first $250,000 of capital gains will be eligible for an inclusion rate of 50 percent after June 25, 2024. Additionally, the lifetime capital gains exemption is also proposed to increase to $1.25 million as of June 25, 2024.

Additional amendments are proposed to provisions dealing with stock option benefits and the associated deduction from income, which is currently one-half of the employment benefit included in income. The stock option deduction is proposed to decrease from one-half to one-third, which effectively provides for a two-thirds inclusion for the benefit deemed received after June 25, 2024. There is relief for those taxpayers who have a combined total of capital gains and stock option benefits less than $250,000, as noted above.