Capital gains inclusion rate change delay: What this means for you

On January 31, 2025, an important announcement was made by the federal government concerning the inclusion rate of capital gains in taxable income. The increase in the inclusion rate from 50% to 66.7% - originally scheduled for 2024 - has been pushed back to January 1, 2026. If you sold investments in 2024 in anticipation of these tax adjustments, you may be wondering what this means for your future planning.

A chronicle of uncertainty: why are we here?

On April 16, 2024, an initial announcement confused investors, businesses and tax experts. The government introduced significant and complex changes that would affect the capital gains inclusion rate, affecting every individual, corporation and trust.

Taxpayers then had two months to react and decide to sell certain assets before the new tax rules came into effect. What's more, the introduction of a $250,000 annual personal threshold made the calculations even more complex. This uncertainty led many investors to make sometimes hasty decisions: selling buildings, investments, and even entire businesses to minimize the tax impact.

The Delay: A Well-Deserved Break

On January 31, 2025, the Minister of Finance announced that the increase in the capital gains exemption threshold from $1 million to $1.25 million, originally scheduled for 2024, would come into effect as planned in June 2024. This threshold is the amount of tax-exempt capital gain on the sale of small businesses.

However, the increase in the capital gains inclusion rate (from 50% to 66.7%), and its $250,000 threshold for individuals, will be postponed until January 1, 2026.

This change in timing clarifies a complex situation as the tax season approaches, providing more time for thoughtful planning.

Have you ever sold investments?

In the spring of 2024, you may have made a strategic decision to sell certain assets to lessen the impact of the new tax rules. If so, the announcement of the postponement gives you a new window of time to rethink your approach. In other words, you now have more time to assess the best strategy to adopt before the implementation of these changes, now scheduled for January 1, 2026.

How can you adapt your asset sale plan to the new situation?

The key to good tax planning lies in anticipating and assessing future tax impacts. Faced with the increase in the capital gains inclusion rate, you're probably asking yourself this crucial question:

"Is it better to sell now and pay about 25% tax on the gains (with a 50% inclusion rate), or should I wait and risk paying up to 33.3% tax on the gains (with a 66.7% inclusion rate)?"

In theory, the answer depends on your long-term asset sale plan. For example, if you were already planning to sell an asset next year, it may be more advantageous to accelerate the sale to avoid a tax increase. However, the decision is not simply an analysis of returns and tax rates. It must take into account broader factors, including :

-The nature of your assets (real estate, financial investments, businesses)

-The composition of your portfolios (asset allocation, personal and corporate management)

-Your annual cash requirements

-Return on your investments

-Opportunities to reinvest in similar assets

Strategies to consider depending on your situation

Depending on your financial profile and objectives, certain strategies may be particularly interesting, such as :

-Progessive Asset Sales: If you hold personal investments, you may want to consider realizing capital gains annually up to $250,000, in order to maintain a lower inclusion rate over the long term, thus avoiding the impact of the increase in the inclusion rate to 66.7%.

-Early sale of assets held by a corporation: If you own assets within a corporation and plan to sell them in the next five or six years, it may make sense to sell them in 2025 to take advantage of the more advantageous taxation before the change. On the other hand, if these assets are not intended to be sold before 2030, it is preferable to hold on to them, even in anticipation of a higher tax rate in the long ¹.

These strategies are relatively simple to implement when dealing with easily interchangeable assets, such as exchange-traded funds. However, they become more complicated if the sale has to be reinvested in very different assets, as is often the case when selling a business.

Plan with care: why consult a financial planner?

The current tax situation is far from stable, and it's possible that the rules will change again, or that announced changes will be reversed by a future government. That's why it's essential to prepare your decisions for next autumn, when the changes will be confirmed or potentially revised.

A competent financial planner is your best ally in this complex process. He or she has the in-depth knowledge of taxation, asset management and cash flow planning to guide you through this changing tax environment. Don't let tax uncertainty confuse you. Consult your planner for personalized advice that will optimize your financial choices and protect you against unforeseen tax impacts.

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Note

[1] Asset generating a 7% rate of return, using tax rates of 25% (current rule) and 33% (new rule).

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