Are you worried about how the upcoming election could affect your investment income?
The inclusion rate for capital gains is the percentage of a taxpayer’s annual capital gain that’s subject to tax.
Currently, only 50 per cent of taxpayers’ capital gains are required to be reported as taxable income, a rate that’s been in effect since 2000. Recently, however, this issue has become a major point of discussion in Canada’s upcoming federal election.
Below, I’ll briefly explain the recent deferral of the two-thirds capital gain tax inclusion rate and outline some possible scenarios depending on which party wins.
How capital gains taxes work
Whenever you sell an investment at a profit, you realize what’s called a “capital gain.” Essentially, you invest your capital, sell your investment, and then come out on top with more capital to work with than you invested.
Investments subject to capital gains tax include:
- Stocks, bonds, and ETFs
- Investment properties
- Personal items you sell that have increase in value over time
- Cryptocurrency
- The sale of a business or business assets
When you file your tax return at the end of the year, you’re required to report all of the capital gains you’ve realized during the tax year in addition to your regular employment income and/or business income.
There are some exceptions to this rule, such as income earned in a Tax-Free Savings Account (TFSA) or a tax-deferred RRSP retirement savings account.
At the current capital gains tax inclusion rate, investors are taxed on 50 per cent of their capital gains. For example, if a taxpayer realizes $100,000 in capital gains for the year, $50,000 of it will be added to their total annual income for tax purposes.
Deferral of the two-thirds capital gains tax inclusion rate
In 2024, the Liberal government under then-prime minister Justin Trudeau proposed raising the inclusion rate to 66.67 per cent (two-thirds) for individuals and businesses with capital gains in excess of $250,000. This proposal aimed to target higher-dollar asset sales and wealthy investors in an effort to raise $19.3 billion in tax revenue over a five-year period.
The proposal was expected to go into effect beginning this tax year. However, on Jan.31 this year, previous minister of finance Dominic LeBlanc announced that this increase would be deferred until Jan.1, 2026.
Pros and cons of an increased capital gains tax inclusion rate
In defence of their decision to increase the capital gains tax inclusion rate, Liberals stated that 99.87 per cent of Canadians wouldn’t be affected and that 5 per cent of Canadians under age 30 had any capital gains at all.
That said, here’s a quick review of some of the pros and cons of a potential capital gains tax inclusion rate:
Pros:
- Could improve tax fairness, as it primarily taxes high-income investors
- Increased government revenue
- Could reduce speculative investing
Cons:
- Discourages entrepreneurial risk-taking for small businesses and investors
- Could negatively impact the middle-class by creating a rapid sell-off of properties and assets before the tax goes into effect
- Could negatively impact the markets, reducing retirement savings plans
- Adds more complexity to the tax system, which could strain the CRA and/or require more government funding for the CRA
Future of capital gains tax with a Conservative win
Earlier this year, Conservative Leader Pierre Poilievre announced that he was committed to repealing the increased capital gains tax inclusion rate if elected.
Shortly after the inauguration of U.S. President Donald Trump, though, economic and political tensions began to rise on both sides of the border as Trump began enacting increased tariffs on Canadian imports, which could deal a harsh blow to Canadian manufacturers and investors.
In the face of these potential losses, Conservatives argue that increasing the capital gains tax inclusion rate could be a gut punch to Canadian businesses. Given the current climate, it seems it seems almost inevitable that a conservative win would see the increased capital gains tax ruling repealed.
Future of capital gains tax with a Liberal win
Despite the bill being introduced by his Liberal predecessor, if Mark Carney wins and is re-elected, it seems that he, too, may also repeal the increased capital gains inclusion rate.
On March 21, Carney officially announced that he plans to cancel the increased tax altogether, in “recognition of the vital role that builders and small businesses play in shaping Canada’s future.”
Final thoughts
At the moment, it seems like both Carney and Poilievre are committed to repealing Trudeau’s proposed capital gains tax increase in an effort to bolster and create confidence in the economy, especially given the rising political and economic tensions with the US.
Assuming the tax proposal is repealed, the current inclusion rate will likely remain at 50 per cent throughout the next prime minister’s term. Depending on how the political landscape changes over the next few years, though, the discussion could come back into play.
For the meantime, you can expect to pay the same capital gains tax as you’ve paid over the past couple of decades.
Christopher Liew is a CFP®, CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers at Blueprint Financial.
