Deferral of Canadian Capital Gain Inclusion Rate Increase and Pre-Exit Opportunities for Departing Canadians

Originally, the Canadian government’s 2024 budget announced a controversial increase to the capital gains inclusion rate from 50% to 66.67% that was to have taken effect on June 25^th, 2024. The increase was to have been far-reaching, affecting individuals, corporations and trusts, and was much decried.

That said, a relief measure was built in to the June 25^th, 2024 change though just for individuals: individuals stood to benefit from a $250,000 CAD annual threshold up until which capital gains would still have benefitted from the prior 50% inclusion rate. Beyond the $250,000 annual threshold, the higher 66.67% inclusion rate would have kicked in. For corporations and trusts, however, no such exemption threshold was granted – all capital gains realized by corporations and trusts were to become subject to the higher 66.67% inclusion rate with no relief.

On January 31^st, 2025, however, the Canadian government announced that the timing of the capital gains increase is now deferred until January 1^st, 2026. This is great news for Canadians who hold significant unrealized gains either personally, within a corporation, or within a trust, who lost their chance to take advantage of the 50% inclusion rate by realizing gains prior to June 25^th, 2024.

With the political turbulence of the Canadian government with Trudeau stepping down, there is speculation that this unpopular change will never see the light of day – if the Conservatives eventually take power, they would likely seek to undo the change entirely, and if the Liberals eke out a victory under a new leader, it is conceivable that they would discard the law as well given its unpopularity with Canadians. It remains to be seen if the capital gains increase will ever take effect, though as it stands now, it is set to take effect on January 1, 2026.

In the meantime, assuming the capital gains increase occurs in 2026, an opportunity arises before year-end 2025 for Canadians planning to move to the US who will face an eventual departure tax upon their exit. When you exit Canada, some capital assets held at departure, including non-registered investment accounts, foreign real estate, shares of corporations and interests in trusts, are subject to a deemed disposition (a fictional sale) based on a crystallization of your unrealized capital gains on the day of exit from Canada. Informally known as “departure tax,” this tax event is a capital gains tax forced by the exit.

Canadians who face a significant departure tax at exit because they hold significant unrealized gains may therefore be faced with an inclusion rate of 66.67% (on the gain portion above $250,000) upon their departure instead of the current rate of 50%, assuming they exit in 2026 or later. Pre-exit planning is crucial, and one such strategy worth considering is to limit exposure to the 66.67% inclusion rate on departure tax by proactively realizing gains in 2025 at the still-current 50% inclusion rate. Even if you plan on moving to the US in a few years from now, you should still consider taking advantage of pre-exit planning in advance, which could potentially save you thousands of dollars in additional departure tax.

Even if departure tax isn’t a factor, realizing unrealized gains proactively in 2025 before the rule change may still be prudent and worth considering regardless. For example, Canadian real estate isn’t subject to departure tax. Nonetheless, opportunities arise for owners of Canadian real estate in a significant unrealized gain position (where the property in question does not qualify for the Principal Residence Exemption) who are considering selling their property in the near future. For example, let’s say you own a secondary residence worth $2,000,000 with a cost basis of $1,000,000: if you sell  the property before January 1^st, 2026, the net taxable capital gain will be $500,000 instead of the significantly higher $625,000 which it stands to be as of 2026 (taking into account the $250,000 threshold).

It’s worth noting here when it comes to real estate, that another typical advantage of selling Canadian real estate before departure can be not having to deal with the hassle of non-resident Canadian withholding tax. Up until the capital gains increase, the required withholding rate has been 25% (37.875% in Quebec) on the gross sale price for non-resident sellers of Canadian real estate until a CRA compliance certificate comes in, which can take several months which can lead to cash flow problems, particularly when there’s a mortgage that must get paid off at closing. With the original June 25, 2024 capital gains increase, the withholding rate was set to increase to 35% (a significant increase to 52.167% for Quebec residents) as of January 1, 2025. With the deferral to 2026, there is some uncertainty around the non-resident withholding rate in 2025, but at the time of writing, it appears that it will remain at 25% for the time being.

Another key point regarding the deferral of the capital gains inclusion rate increase has to do with the Lifetime Capital Gains Exemption (LCGE). As a compensating measure, when the June 25, 2024 increase was first announced, the government announced that the LCGE was set to increase to $1,250,000 from the $1,016,836 level it was at on January 1, 2024.  That said, even with the deferral of the capital gains increase to January 1, 2026, it was announced that the LCGE increase to $1,250,000 remains effective as of June 25, 2024, so this is welcome news indeed to Canadian taxpayers who may be eligible for the LCGE on the sale of qualifying property in 2025.

To discuss the capital gains changes and how it may pertain to your cross-border tax situation, please reach out to schedule a consultation.