DFK Tax Newsletter
Capital Gains Inclusion Rate: The Final Word
Long-time readers may remember our earlier article on the “Capital Dividend Election Trap,” which warned about the risks created by the Federal Government's proposed increase to the capital gains inclusion rate (the portion of capital gains that are taxed) from 50% to 66.7%. After more than a year of uncertainty, that saga has finally come to an end — and it is worth revisiting what actually happened, and what it means going forward.
A Quick Recap
The 2024 Federal Budget proposed increasing the capital gains inclusion rate from 50% to 66.7%, effective June 25, 2024, on gains realized annually above $250,000 by individuals and on all gains realized by corporations and most trusts1. Businesses and advisors spent well over a year preparing for the change, restructuring transactions and, in some cases, filing on the basis of the higher rate before it was even legislated.
On January 31, 2025, the Department of Finance deferred the effective date to January 1, 2026. Then, on March 21, 2025, Prime Minister Mark Carney announced that the government would cancel the increase altogether. Budget 2025, tabled on November 4, 2025, formally confirmed the cancellation in legislation.
Where Things Stand Now
The capital gains inclusion rate remains at 50% for all taxpayers — individuals, corporations, and trusts alike. There is no $250,000 annual threshold and no two-tier system to track. For most purposes, it is as though the proposed increase never happened.
That said, a few related measures did carry through. The increase to the Lifetime Capital Gains Exemption (“LCGE”) to $1.25 million (from roughly $1.02 million), which was announced alongside the original inclusion rate proposal, was preserved and took effect June 25, 2024. Indexation resumed in 2026, bringing the LCGE to $1,275,000 this year. On the other hand, the Canadian Entrepreneurs' Incentive — which would have gradually reduced the inclusion rate on up to $2 million of eligible gains for qualifying business owners — was cancelled in Budget 2025 and will not be introduced.
What This Means for Capital Dividend Elections
The good news is that the averaging calculation and election risk we flagged in our earlier article never actually materialized for most corporations, because the higher inclusion rate never took effect. Capital dividend account balances can continue to be calculated the way they always have — based on the straightforward 50% non-taxable portion of capital gains, without the year-end averaging exercise that a mixed-rate fiscal period would have required.
The one group still dealing with cleanup is the small number of corporations that followed CRA's earlier guidance and filed on the basis of the proposed two-thirds inclusion rate before it was cancelled. The CRA has indicated it will coordinate corrective reassessments for those filings to reverse the higher rate2. If your corporation filed on that basis, it is worth confirming with your DFK advisor that the correction has been made.
The Takeaway
This episode is a useful reminder that proposed tax measures — even ones announced in a federal budget — are not law until they are actually enacted, and that timelines can shift significantly along the way. Business owners who restructured transactions, accelerated the sale of assets, or held off on planning altogether in anticipation of the increase may now want to revisit those decisions in light of the current, and much simpler, 50% inclusion rate. As always, consult your DFK tax professional before finalizing any capital gains or capital dividend planning.
1Department of Finance Canada, Budget 2024
2Canada Revenue Agency, Update on the CRA's administration of the proposed capital gains taxation changes, January 31, 2025.
