Table of Contents
Scenario 1: Capital Gains Charlie (Individual)
Scenario 2: Corporate Gains Gloria (Corporation)
Capital Gains Taxation in Canada: Understanding Inclusion Rates
In Canada, only a portion of capital gains is included in your taxable income, determined by the inclusion rate. Currently, this rate is set at 50%. This means only 50% of total Capital Gains in a given year are included in your income.
In the 2024 Fall Economic Statement, the federal government proposed changes to capital gains taxation, which will be explained in depth later on in this blog. These changes were initially scheduled to take effect on June 25, 2024. However, the legislative process was interrupted in January 2025 when Prime Minister Justin Trudeau prorogued Parliament, nullifying the proposed bill before it could receive Royal Assent.
Despite this, the Canada Revenue Agency (CRA) has continued to apply the proposed rules, requiring taxpayers to report capital gains using the higher inclusion rate. This approach reflects the CRA’s established practice of enforcing proposed tax measures from their effective date, even before they become law. While this approach has generally worked in the past due to most proposals eventually becoming law, the uncertain political climate coupled with opposition from the Federal Conservative Party raises doubts about whether this legislation will be reintroduced.
This situation has created a challenging dilemma for taxpayers. They must either report their capital gains using the higher rate, with the possibility of requesting a refund if the changes fail to pass or stick with the current 50% rate and risk owing interest if the legislation is eventually enacted. Either choice introduces complexities and potential financial consequences, leaving many individuals and businesses feeling frustrated and unsure of the best course of action.
While these changes may no longer be imminent, staying informed about the potential for tax reforms and understanding how these proposals might affect your financial planning is key.
This blog will break down the history of the Capital Gains inclusion rate in Canada, the mechanics of Canada’s proposed capital gains rules and provide a case scenario for both an individual and corporation.
History of Capital Gains Inclusion Rate in Canada
Time Period | Inclusion Rate |
Before 1972 | 0% |
1972 to 1987 | 50% |
1988 and 1989 | 66 2/3% |
1990 to February 27, 2000 | 75% |
February 28 to October 17, 2000 | 66 2/3% |
October 17, 2000 - June 24, 2024 | 50% |
Proposed for June 25, 2024 onwards | 66 2/3% |
Breakdown of Proposed Capital Gains Tax Rules (Proposed, thrown out, and Currently Enacted, but not passed)
The federal government’s proposed changes aim to make the tax system more progressive. Here’s how they work:
For Individuals:
The first $250,000 of net capital gains realized annually is taxed at the previous inclusion rate of 50%.
Any gains exceeding $250,000 are taxed at the new inclusion rate of 66.67%.
For Corporations and Trusts:
All capital gains are taxed at the new inclusion rate of 66.67%, with no thresholds or exemptions.
Example Scenarios
Scenario 1: Meet "Capital Gains Charlie" (Individual)
Capital Gains Charlie recently sold his condo investment unit on June 26, 2024! With net capital gains of $400,000, Charlie is very stressed about what his tax bill will be under the new rates. To make matters worse, Charlie is in the top income tax bracket of 53.53%.
Assumptions
Assumption | Value |
Annual net capital gains | $400,000 |
Marginal tax rate | 53.53% |
Previous inclusion rate | 50% |
New inclusion rates | 50% for first $250,000 |
66.67% for excess |
Prior Rules (50% Inclusion Rate)
Calculation | Formula | Value |
Taxable capital gains | $400,000 × 50% | $200,000 |
Tax payable | $200,000 × 53.53% | $107,060 |
New Rules (2024)
Step | Calculation | Value |
Taxable gains for the first $250,000 | $250,000 × 50% | $125,000 |
Taxable gains for excess of $150,000 | $150,000 × 66.67% | $100,005 |
Total taxable capital gains | $125,000 + $100,005 | $225,005 |
Tax payable | $225,005 × 53.53% | $120,445 |
Impact on the Individual
Previous tax liability | $107,060 |
New tax liability (2024) | $120,445 |
Increase in taxes | $13,385 (~12.5%) |
Capital Gains Charlie is now very sad.
Scenario 2: Say Hello to "Corporate Gains Gloria" (Corporation)
Similar to Capital Gains Charlie, Capital recently sold her condo investment unit on June 26, 2024! With net capital gains of $400,000.
Assumptions
Assumption | Value |
Annual net capital gains | $400,000 |
Corporate tax rate | *50% |
Previous inclusion rate | 50% |
New inclusion rate | 66.67% |
*Approximate Passive income rate (RDTOH balance will offset some of this extra tax paid in the future)
Prior Rules (50% Inclusion Rate)
Calculation | Formula | Value |
Taxable capital gains | $400,000 × 50% | $200,000 |
Tax payable | $200,000 × 50% | $100,000 |
New Rules (2024)
Calculation | Formula | Value |
Taxable capital gains | $400,000 × 66.67% | $266,667 |
Tax payable | $266,667 × 50% | $133,333 |
Impact on the Corporation
Metric | Value |
Previous tax liability | $100,000 |
New tax liability (2024) | $133,333 |
Increase in taxes | $33,333 (33.3%) |
Corporate Gains Gloria is now sadder than Capital Gains Charlie. Gloria, a mastermind of corporate strategy, now needs to rethink her tax planning to navigate this steeper terrain effectively.
Contact Us!
Are you like Condo Charlie or Capital Gains Gloria and feeling overwhelmed by how tax changes could impact your finances? Don’t navigate the complexities of tax planning alone.
Contact us today to learn how you can optimize your tax strategy and keep more of your hard-earned gains. Let’s turn these new tax rules into opportunities instead of obstacles!
Disclaimer
This article provides general information that is current as of the posting date and is not updated, which means it may become outdated. The content is not intended to provide accounting, tax, or financial advice and should not be relied upon as such. Tax and financial situations are unique to each individual and may differ from the examples discussed in this article. For personalized advice, please consult a qualified tax professional.
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