(From the March 2025 Edition of eFORUM)
By Kevin Wark
In late December, then Finance Minister Domenic Leblanc announced that implementation of the capital gains proposals would be delayed until 2026. However, more recent comments by Prime Minister Mark Carney, combined with the federal election scheduled for late April, have significantly changed the landscape for these proposals. Here, we review the status of the various tax proposals and what planners and their clients might expect in the future.
What we know
First, it now appears clear that the increase in the capital gains inclusion rate to 66 2/3% will not be moving forward in 2026. Both the Prime Minister and the leader of the Conservative Party have indicated they do not support this legislation. This is positive news for most taxpayers — and especially for shareholders of private corporations, as their corporations would not otherwise have had access to the 50% inclusion rate on up to $250,000 of capital gains earned in a taxation year.
It is expected that small business owners will continue to benefit from the proposed increase in the lifetime capital gains exemption (to $1.25 million), effective for qualifying capital gains realized after June 24, 2024. However, with the upcoming election, it is less clear if the proposed Canadian Entrepreneurs’ Incentive (CEI) will become effective for the disposition of qualifying shares commencing in 2025. The CEI would reduce the inclusion rate to 33 1/3% on up to $400,000 in eligible capital gains in 2025.
Unfortunately, taxpayers who triggered capital gains before June 25, 2024, to avoid the inclusion rate increase may have additional taxes to pay for the 2024 tax year. To make matters worse, the Alternative Minimum Tax could result in additional taxes for individual taxpayers who realized larger capital gains in 2024.
What we understand
While the various announcements relating to the capital gains proposals did not specifically comment on other changes included in the capital gains legislation, it can be safely assumed that proposals to limit the stock option deduction to one-third of the benefit, and the change in the stop-loss reduction rules from 50% to 33 1/3%, will also not proceed in 2026.
What is still not clear
In a technical tax bill (TTB) released by Finance Canada in August 2024, important relief was provided to deceased taxpayers and their estates. The proposals are of particular interest to shareholders of private corporations and their post-mortem tax planning.
Under current rules, if a deceased’s graduated rate estate (GRE) realizes a capital loss in its first taxation year, a special provision permits the capital loss to be carried back to the deceased’s terminal return to offset capital gains in the year of death. However, another rule limits the amount of the capital loss that may be carried back by a GRE when the deemed dividend on a share redemption is treated as a capital dividend. A partial exception to this stop-loss rule is available to a GRE when the redemption takes place in its first taxation year.
The TTB proposed to amend these provisions so they will apply in the first three taxation years of the GRE. This would provide additional time to implement the required transactions to trigger the capital loss in the GRE. These changes were to be effective for deaths occurring on or after August 12, 2024. While the 2024 Fall Economic Statement confirmed the federal government’s plans to move forward with this legislation, it can be expected this will be delayed as the newly elected government gets settled and focuses on more pressing issues.
In summary, we likely won’t get the full picture of how various outstanding tax measures will proceed until after the upcoming federal election and possibly much later.
Kevin Wark, LLB, CLU, TEP, is managing partner of Integrated Estate Solutions and a tax advisor to CALU. He is the author of the popular consumer book The Essential Canadian Guide to Estate Planning (3rd Ed.), as well as tax guides on corporate-owned life insurance, life insurance transfers, insured buy-sell agreements, and income-splitting strategies, available through Amazon.ca.