How the capital gains increase could affect taxpayers

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Last week’s prorogation of Parliament means that the potential increase to the capital gains tax, which was to be effective June 25, 2024, is officially dead — at least for now. That being said, there’s a chance it could be resurrected, retroactively, when Parliament resumes, or, as a spring election is widely expected, potentially by a new government, depending on who wins.

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On Thursday, Conservative leader Pierre Poilievre promised to eliminate the increase to the capital gains inclusion rate if elected. Citing a recent C.D. Howe Institute report by Jack Mintz estimating the increased inclusion rate would reduce employment by 414,000 jobs, Poilievre said the capital gains tax increase “was a bad idea before President Trump’s tariff threat” and that “it is outright insanity now.”

While much has been written about whether or not the tax changes will go through, the government announced last week that the Canada Revenue Agency (CRA) will be administering the changes to the capital gains tax effective June 25, 2024.

The CRA is expected to issue the forms needed to allow taxpayers to file in accordance with the new capital gains rules by the end of the month. Arrears interest and penalty relief, if applicable, will be provided to corporations and trusts impacted by these changes whose 2024 tax returns are due on or before March 3, 2025.

The government also confirmed that even if Parliament is ultimately dissolved and there is an election, the CRA will “generally continue to administer proposed legislation consistent with its established guidelines.” Once Parliament resumes, if no bill is introduced and passed, and the government signals its intent not to proceed with the proposed capital gains tax, the CRA would cease to administer it.

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The advice I gave last week was that if you don’t want to risk being charged non-deductible arrears interest, compounded daily, at the prescribed rate (eight per cent), it’s probably best to pay your capital gains tax at the higher inclusion rate, as applicable. If the capital gains tax increase doesn’t get passed, you’ll be entitled to a tax refund, along with refund interest (at six per cent), starting May 30, 2025, assuming you file your 2024 personal return on time.

As a reminder, the 2024 federal budget proposed an increase to the capital gains inclusion rate for gains realized on or after June 25, 2024, whereby the inclusion rate was increased to 66.67 per cent, up from 50 per cent. Individuals and certain trusts (specifically, graduated rate estates and qualified disability trusts) would still be entitled to the former 50 per cent inclusion rate on the first $250,000 of capital gains annually. Corporations and most family trusts would not. For individuals, the increase in the top tax rate on capital gains over $250,000 is about nine percentage points.

While there is certainly a lot of buzz about the tax uncertainty, let’s take a deeper dive into who may be affected, and the actual monetary trade-off of choosing not to follow the CRA’s guidance. Here are a few examples.

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The investor

Joel lives in Alberta, is in the top tax bracket of 48 per cent, and has a handsome non-registered portfolio worth $2 million. He turns over about 20 per cent of the portfolio annually. For 2024, his portfolio, which closely tracks the S&P 500 index, was up about 25 per cent, and he did some year-end rebalancing in December 2024, selling about $400,000 of his securities. Assuming an adjusted cost base of $320,000, he realized $80,000 of capital gains.

Because Joel’s post-June 24 gains are less than $250,000, he is not affected by the changes, and at a 50 per cent inclusion rate, he would pay about $19,200 of tax in Alberta.

The doctor

Jeff is an Ontario physician who pays tax at the top rate, and who runs his medical practice through his professional corporation. He has the same $2 million investment portfolio, but it is held inside his corporation. If his corporation also realized $80,000 of capital gains in December 2024, his corporation would face capital gains tax at the new two-thirds inclusion rate, as corporations don’t get the benefit of the lower rate on the first $250,000 of gains.

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As a result, Jeff’s fully integrated combined federal/Ontario tax rate on capital gains taxed at the two-thirds inclusion rate is 38.6 per cent. That rate includes the total tax paid corporately and personally when the funds are paid out to Jeff as dividends from his corporation. That rate is nearly 10 percentage points higher than the 29 per cent integrated rate that Jeff would have paid on those corporately earned capital gains before June 25, 2024, when the inclusion rate was 50 per cent.

On Tuesday, the presidents of national, provincial and territorial medical associations once again called on the federal government to halt the capital gains tax increase. In a letter to Finance Minister Dominic LeBlanc, they urged the CRA “to stop collecting taxes on capital gains from medical corporations at a higher inclusion rate, providing much needed clarity and abandoning this harmful tax measure.”

The letter noted that “changes to the capital gains inclusion rate have caused a retroactive increase in tax on the retirement savings of mid- to late-career doctors and will serve as a disincentive for new graduates considering community-based practice.”

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The chalet owner

Laurie lives in British Columbia, and, until recently, owned a ski chalet at Whistler that she sold for $1.5 million in late November 2024. Her adjusted cost base was $500,000, resulting in a $1 million capital gain, as the chalet was not her principal residence.

The first $250,000 of her gain is half-taxable, but the remaining $750,000 is taxed at the proposed two thirds inclusion rate. The additional tax on the $750,000 portion of the gain is about 9 per cent, or $67,500.

When Laurie files her 2024 tax return this April, she will need to decide whether to pay this $67,500 of extra tax on the gain based on the CRA guidance, or wait to see whether the legislation ultimately gets passed, retroactive to 2024. If she pays her tax by April 30, 2025, she will ensure that no interest gets charged if the legislation ultimately gets passed.

But if Laurie instead decides to hang on to her $67,500 for a couple of months to see what happens politically between the April 30 tax deadline, and, say, June 30, she risks non-deductible arrears interest of about $900 ($67,500 times eight per cent times two divided by 12), which may be a risk she is willing to take as she will have had the use of those funds for an extra two months.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com.

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