The recent prorogation of Parliament has left Canadians uncertain about proposed changes to the capital gains tax. These changes, initially introduced by the Liberal government, have sparked intense debate among businesses, economists, and taxpayers alike. Below, we break down what the changes entail, their potential impact, and the current state of affairs.
Table of Contents
What Are the Proposed Capital Gains Tax Changes?
In spring 2024, the federal Liberal government proposed increasing the “inclusion rate” for capital gains tax. This refers to the percentage of profits, or capital gains, from selling assets like stocks, family businesses, or cottages that are subject to taxation.
- Old Rule: Canadians pay taxes on 50% of the profit from capital gains.
- Proposed Rule: Canadians would pay taxes on 67% of the profit from capital gains.
The new inclusion rate applies to annual capital gains exceeding $250,000 for individuals. However, for businesses, the higher rate would apply to all capital gains, regardless of the amount.
Why Were These Changes Proposed?
Former Finance Minister Chrystia Freeland unveiled the changes in the federal budget, stating they were necessary to address tax fairness and raise revenue for key government programs, such as:
- Pharmacare
- Dental care
- Childcare
- Green energy initiatives
Freeland emphasized that the changes primarily target the wealthiest Canadians. According to her, only 0.13% of Canadians—earning an average annual income of $1.4 million—would pay more under the new rules.
The Impact of Parliament’s Prorogation
Prime Minister Justin Trudeau prorogued Parliament on January 6, 2025, which effectively halted all bills and motions that had not yet received royal assent. This includes the capital gains tax proposal.
While the measure has not been formally approved, the Canada Revenue Agency (CRA) has already begun collecting taxes based on the higher inclusion rate. This approach aligns with government practices that implement tax changes as soon as a notice of ways and means motion is tabled.
Reactions to the Tax Changes
Business Concerns
The Canadian Federation of Independent Business (CFIB), led by President Dan Kelly, has expressed strong opposition to the tax hike.
- Key Concern: Uncertainty surrounding the implementation timeline and its impact on businesses.
- Many businesses and entrepreneurs are now scrambling to budget for the higher tax rate on asset sales, including family businesses.
Kelly has urged the CRA to revert to the previous 50% inclusion rate, stating, “We could be in this weird limbo period for a year or two, driving uncertainty, which is super unfair to my members.”
Economic Debate
- Critics argue the tax hike will stifle growth and harm small businesses and middle-class Canadians.
- Economist Jack Mintz estimates that as many as 1.26 million Canadians could pay the higher rate at some point.
Government’s Stance
The Department of Finance has defended the changes, stating they are necessary for fairness and consistency. However, it also acknowledged that if Parliament does not pass a bill formalizing the changes, the CRA will revert to the original 50% inclusion rate.
What Happens Next?
With Trudeau’s resignation as Liberal leader and the prorogation of Parliament, the fate of the capital gains tax changes is uncertain.
- The next session of Parliament will determine whether the changes proceed.
- If the measures are scrapped, taxpayers who paid the higher rate may apply for refunds.
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Who Will Be Affected?
- Individuals: Any Canadian with annual capital gains exceeding $250,000 will face the higher tax rate.
- Businesses: All capital gains will be taxed at the new rate, regardless of the amount.
- Entrepreneurs: Those selling businesses or family properties like cottages will need to account for the increased tax burden.
Final Thoughts
The debate over Canada’s capital gains tax highlights the tension between generating revenue for social programs and ensuring a fair tax system. As Parliament reconvenes, taxpayers should stay informed about potential developments and prepare for either scenario—whether the tax increase is formalized or rolled back.
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