Capital Gains Tax Changes – What It Means for You & Your Tax Planning

On January 31, 2025, the Government of Canada announced capital gains tax changes, including a deferral of the previously proposed increase to the capital gains inclusion rate.

Originally, these proposed capital gains tax changes were set to take effect on June 25, 2024.

For individuals, business owners, and corporate taxpayers, this provides certainty when reporting capital gains and additional time to reassess tax strategies and plan accordingly.

Key Changes and Their Impact

Lifetime Capital Gains Exemption (LCGE) Adjustment

• Effective June 25, 2024, the LCGE increases to $1.25 million (from $1,016,836) for:
  • Qualified small business corporation (QSBC) shares
  • Qualified farming and fishing properties

This increase offers additional tax planning opportunities for business owners who may be considering a sale.

New Canadian Entrepreneurs’ Incentive

• Starting in 2025, eligible entrepreneurs can access a reduced inclusion rate of 33.33% on a lifetime maximum of $2 million in capital gains.
• The cap will increase annually by $400,000, reaching $2 million by 2029.
• Combined with the LCGE, eligible business owners could benefit from lower taxes on up to $6.25 million in capital gains[1].

Key Considerations for Tax Planning

Clients should assess these capital gains tax changes and structure transactions strategically to minimize tax exposure.

For Individuals

• Review your investment portfolio to determine if it makes sense to trigger gains under the current inclusion rate.
• Plan for real estate and secondary property sales—the principal residence exemption remains unchanged, but gains on rental or secondary properties could be affected.

For Business Owners

• If considering selling your business, evaluate the timing of the sale to maximize the increased LCGE.
• Incorporated businesses and trusts should review their capital gain exposure and consider tax-efficient restructuring strategies.
• The Canadian Entrepreneurs’ Incentive could offer tax savings, but eligibility and structuring require careful planning.

For Corporations and Trusts

• Consider reviewing investment holdings and surplus extraction strategies.
• If your corporation holds passive investments, it may be beneficial to reassess your approach to managing gains and distributions.

CRA Administration and Compliance Considerations

• The CRA will continue to administer the current 50% inclusion rate.
• If a tax return was filed assuming a higher inclusion rate, the CRA will adjust assessments accordingly.
• Penalty and Interest Relief: The CRA has extended relief from late-filing penalties and interest for taxpayers reporting capital dispositions:
  • Until June 2, 2025, for individual filers.
  • Until May 1, 2025, for trust filers.

Next Steps: Strategic Planning

Given these capital gains tax changes, it’s essential to start planning now. Consider:

• Timing asset sales—especially for investments, real estate, or business interests that may be affected.
• Maximizing available exemptions (LCGE, Canadian Entrepreneurs’ Incentive).
• Reviewing corporate tax strategies to mitigate tax exposure.
• Working with Manning Elliott tax professionals to model potential scenarios and ensure you optimize your tax position.

Still Have Questions About Capital Gains Tax?

If you have questions about Canada’s capital gains tax changes or would like a personalized tax strategy, please contact us for a consultation.

Follow our Manning Elliott blog for up-to-date articles frequently concerning the most recent changes to provincial and federal legislation. 

NOTE: Canadian tax laws are complex and subject to frequent changes. The contents of this Manning Elliott blog are not intended to represent legal or tax advice. Please consult your tax adviser before employing any strategies that may have been discussed within this article.

[1] Department of Finance release dated January 31, 2025