As outlined in our recent publication, Federal Government Prorogues Parliament – Tax Implications, the prorogation of Federal Parliament on January 6, 2025 brought to an end all proceedings before Parliament. This includes the draft legislative proposals relating to the increased capital gains inclusion rate (including changes relating to the employee stock option deduction) and the increase in the Lifetime Capital Gains Exemption (“LCGE”) to $1.25M, all of which had not yet been formally enacted.
As originally announced in the 2024 Federal Budget, these proposals sought to increase the capital gains inclusion rate for corporations and most trusts to 2/3 (from 1/2) and for individuals to 2/3 (from 1/2) on the portion of capital gains realized in the year that exceed $250,000, for dispositions on or after June 25, 2024. For further details of these proposals, please ask your BMO Private Wealth professional for a copy of our publication Capital Gains Tax Update: What You Need to Know Now.
Impact to 2024 tax returns
Despite the prorogation, with regards to how taxpayers should file their 2024 tax returns, the Canada Revenue Agency (“CRA”) previously announced that it would administer the proposed legislation with the higher capital gains inclusion rates effective June 25, 2024. Updated forms for individuals, trusts and corporations were to be available by the end of January 2025, and arrears interest and penalty relief would be provided to impacted corporations and trusts with a filing due date on or before March 3, 2025.
The CRA’s position created much uncertainty for taxpayers potentially affected by these proposed changes, who would be faced with a choice between: (i) following the CRA’s above guidance and seeking a refund of the higher tax calculated if the capital gains proposals are ultimately not enacted; or (ii) filing on the basis of the current legislation (50% inclusion rate) and being assessed additional tax (and potential interest and penalties) should the legislation be enacted as proposed, to the extent the higher 2/3 inclusion rate would otherwise apply.
Deferral of implementation to 2026
However, on January 31, 2025, the Department of Finance announced that it is deferring—from June 25, 2024 to January 1, 2026—the effective date on which the capital gains inclusion rate would increase from 1/2 to 2/3 on capital gains realized annually above $250,000 by individuals, and on all capital gains realized by corporations and most types of trusts.
Notwithstanding this deferral of the proposed increase to the capital gains inclusion rate, the government simultaneously announced that it intends to proceed with other related capital gains measures from the 2024 Federal Budget, on the original timeline. Specifically, the proposed increase in the LCGE to $1.25M (from $1,016,836) on the sale of small business shares and farming and fishing property will proceed as of June 25, 2024, and the proposed new Canadian Entrepreneurs’ Incentive (“CEI”), which would reduce the tax rate on capital gains on the disposition of qualifying shares to one-half of the prevailing inclusion rate on a lifetime maximum of up to $2M in eligible capital gains, would proceed to be effective as of 2025.
The government further announced that it intends to introduce legislation effecting the increase in the capital gains inclusion rate, the increase in the LCGE and the introduction of the CEI in due course. However, with the current prorogation of Parliament and the possibility of an upcoming Federal election and potential new government, the future status of these measures remains uncertain, though the clarity for the 2024 tax filing season is welcomed.
For more information on these proposed changes to the taxation of capital gains, please ask your BMO professional for a copy of our 2024 Federal Budget Summary.
Update on CRA’s administration of the proposed changes to capital gains taxation
Subsequent to the Department of Finance announcement of the deferred implementation date, the CRA announced that it has now reverted to administering the currently enacted 50% inclusion rate for all capital gains realized before January 1, 2026, but will maintain the existing June 25, 2024, coming into force date of the proposed increased LCGE limit of $1.25M.
The CRA also noted that it will issue forms that revert to the currently enacted (50%) inclusion rate in the coming weeks. It further outlined that relief for late-filing penalties and arrears interest will be granted until June 2, 2025, for impacted T1 Individual filers, and until May 1, 2025, for impacted T3 Trust filers, to provide additional time for taxpayers reporting capital dispositions to meet their tax filing obligations.
For corporate taxpayers, the CRA indicated that corporations can continue to use existing forms and tax software to file using the 50% inclusion rate. For the small number of corporations that followed CRA’s prior guidance to file on the basis of the proposed higher inclusion rate, the CRA will coordinate corrective reassessments.
Charitable donations – Update of extended 2024 deadline
As further noted in our recent publication Federal Government Prorogues Parliament – Tax Implications, on December 30, 2024, the Federal government announced its intention to amend the Income Tax Act to extend the deadline for making charitable donations eligible for tax support in the 2024 tax year, until February 28, 2025, to mitigate the impacts of the recent Canada Post mail stoppage.
Subsequently, the Department of Finance released draft legislation in support of this proposed change, which will be introduced in Parliament in due course. The CRA simultaneously confirmed that it will proceed with administering the 2024 deadline extension for charitable donations under the proposed legislation, consistent with its longstanding practice.
Accordingly, individuals may claim the eligible amount of certain gifts made to charities or other qualified donees up to February 28, 2025, on their 2024 personal income tax return. However, the gift must be in the form of cash, cheque, credit card, money order, or electronic payment, and cannot be made through a payroll deduction or by an individual's Will if the individual died after 2024.
If individual donors do not claim gifts made to charities and other qualified donees up to February 28, 2025 on their 2024 personal income tax return, these amounts can still be claimed on their 2025 return or carried forward.
Corporations and graduated rate estates (with taxation years ending after November 14, 2024, and before 2025) are also eligible for a deadline extension, with some modifications.
Stay tuned
Given the uncertainty, it is possible that these tax proposals may not ultimately be enacted into law as described (or at all). Accordingly, please consult with your personal tax advisor for direction in your particular situation.
For more information, please speak with your BMO Private Wealth professional.
