The Capital Gains Inclusion Rate: The Increase That Was Cancelled

For most of two years the capital gains inclusion rate was the most discussed number in Canadian personal tax, and a remarkable share of the people who discussed it now hold a belief that is not correct. The proposed increase was announced in June 2024. It was deferred in January 2025. It was cancelled outright in March 2025. The rate that applies is one half, as it was before, and nothing about the ordinary treatment of a capital gain for an individual changed. But the announcement travelled far further than the cancellation did, which is how these things usually go, and the consequence is that people are still making decisions, selling property, restructuring corporations, accelerating dispositions, on the basis of a change that was withdrawn. This article sets out what actually happened, in order, with the dates, and then explains what an inclusion rate is, why the episode is worth remembering, and what an individual actually controls.

What actually happened, in order

In June 2024 the federal government proposed increasing the capital gains inclusion rate from one half to two thirds, with an annual threshold intended to protect smaller gains realised by individuals. That proposal generated a great deal of activity through the second half of that year.

On 31 January 2025 the government announced that implementation would be deferred, and that the existing one half inclusion rate would remain in effect in the meantime.

On 21 March 2025 the government announced that the proposed increase was cancelled. Not deferred again: cancelled. The same announcement said the increase to the lifetime capital gains exemption for sales of small business shares and of farming or fishing property would be maintained, with legislation to be introduced at a future date.

So the position for an individual is the position that existed before June 2024. One half of a capital gain is included in income and taxed at ordinary rates. That is the whole of it.

What an inclusion rate actually is

The confusion that surrounds this subject is partly a vocabulary problem. The inclusion rate is not the tax rate on a capital gain. It is the portion of the gain that is included in taxable income, after which ordinary rates apply to that portion.

So at a one half inclusion rate, half of a gain enters income and is taxed at whatever rate applies to the taxpayer, and the other half is not taxed at all. The effective rate on the whole gain is therefore roughly half the taxpayer’s ordinary rate, which is why capital gains have historically been the most favourably treated of the three forms of investment income.

Two related things are worth keeping straight. A gain is only taxed when it is realised, which means when the property is sold or is deemed to have been disposed of, including at death. And the principal residence exemption is a separate rule that can eliminate the gain on a home entirely where the conditions are met, which is why the sale of a family home usually raises no tax at all.

What the episode cost people

Between the proposal and the cancellation, a great many transactions were accelerated to get ahead of a change that never took effect. Properties were sold, corporate structures were reorganised, and gains were realised earlier than they otherwise would have been.

Realising a gain early is not free. Tax that would have been deferred, sometimes for decades, was paid immediately, and the money that paid it stopped compounding. For a corporation, a reorganisation carries professional fees and consequences of its own. None of that is recoverable, and none of it was anybody’s fault in the ordinary sense: the people acting were responding to an announcement the government had made.

This is worth stating without blame because the lesson is practical rather than political. A proposal is not a law. Draft legislation is not enacted legislation. And the appropriate response to an announced change is usually to model it, understand what it would mean, and decide what would have to be true before acting, rather than to act on the announcement itself.

The counterweight is honest too. Some transactions genuinely could not wait, and acting on the information available at the time was reasonable. The point is not that anyone was foolish; it is that urgency created by an announcement is a poor reason to accelerate an irreversible decision, and this episode is the clearest recent demonstration of it.

What an individual actually controls

Not the rate. The rate is set by legislation and will be whatever it is. What an individual controls is the timing of a realisation, and that lever is more useful than most people realise and is available every year.

A gain realised in a low income year is taxed less than the same gain realised in a high income year. A gain spread over more than one year, where the property allows it, is taxed at lower marginal rates than the same gain concentrated in one. A gain realised in the same year as a large deduction is partly absorbed by it. And a loss realised in the right year can be applied against gains, subject to the rules that prevent claiming a loss while keeping the position.

For anyone with a substantial unrealised gain, on a cottage, a rental, a business, or a long held portfolio, the questions that matter are not about policy. They are: what would the tax be if this were disposed of today, what happens to it at death if it is never sold, and is there anything that should be done in advance so the estate is not forced to sell the asset to pay the tax on it. That last one is where insurance sometimes has a role, and where this site has a separate article.

The exemption that was kept

The March 2025 announcement did more than cancel. It confirmed that the increase to the lifetime capital gains exemption, which applies to the sale of qualifying small business corporation shares and of qualified farm or fishing property, would be maintained, with legislation to be introduced at a future date.

That matters to a specific and important group: owners of qualifying private businesses, and farming and fishing families, for whom the exemption is often the single largest tax planning feature of their working lives. Whether shares qualify is a technical test involving the nature of the assets and how long they have been held, and it is frequently possible to fail it by accident, through accumulated cash or non active assets sitting in a corporation.

This page does not state the exemption amount, because the announcement said legislation would follow and the enacted figure and its indexation are matters for a qualified tax professional. What belongs here is the instruction: if you own a business you may one day sell, the question of whether it currently qualifies is worth asking now rather than in the year of the sale, because the remedies take time.

The number that decides the gain, and the records nobody keeps

The inclusion rate gets all the attention and the adjusted cost base does all the work. A capital gain is the proceeds of disposition less the adjusted cost base and the costs of selling, so the base is half of every calculation and it is the half taxpayers are responsible for tracking.

It moves more than people expect. Purchase commissions and legal fees go into it, and so do capital improvements to a property, while ordinary repairs do not. Reinvested distributions from a fund go into it every year, which is why a base can rise without a dollar being added, and forgetting them means paying tax twice on the same money. A return of capital reduces it, which is the direction that produces a surprise.

Property held in a foreign currency adds a step, because the purchase and the sale are each converted at the rate for their own date, so a gain can exist in Canadian dollars where there was none in the other currency.

All of which leads to one instruction: keep the paperwork, from the purchase onward, for as long as you hold the property. The Canada Revenue Agency expects the taxpayer to substantiate the base, and a cottage bought decades ago with a renovation nobody documented is the classic difficult file. What happens to that gain when the property is never sold is covered in passing on the family cottage.

Losses, and the rule that catches people out

A capital loss is not a general deduction. It offsets capital gains, and only capital gains, which is why a year of losses does not reduce employment income. An unused loss can be carried back against gains reported in a limited number of earlier years and carried forward indefinitely, so a loss is rarely wasted but it is frequently forgotten. The Agency reports the balance in its own records, which is worth checking before realising a large gain.

The rule that catches people out is the one against selling for the loss and buying the same thing straight back. Where the taxpayer or an affiliated person acquires the identical property within a defined period around the sale and still holds it at the end of it, the loss is denied and added to the base of the repurchased property instead. That is a deferral rather than a penalty, although a household counting on the deduction does not experience it that way.

Two points close this. Losses realised in one spouse’s account do not simply offset the other spouse’s gains, and attempts to move them across are what the affiliated person rules address. And the year of death has its own treatment, which belongs with a qualified tax professional.

Where to find the rate that applies to your year

This page prints no inclusion rate on purpose, and the last few years are the argument: a page that had printed a figure at any point in that sequence would have been wrong for part of it.

The rate that matters is the one in force for the year of the disposition, and it is published where it is authoritative. The Canada Revenue Agency sets it out in its capital gains guide and in the schedule filed with the return, and a taxpayer who reads it there is reading the enacted rule rather than a recollection of the coverage.

The same caution applies to anything described as coming: a measure announced with legislation to follow is not yet a rule a household can plan around. Confirm the position for your own year with a qualified tax professional before an irreversible disposition rather than after it.

Frequently Asked Questions

Continue Learning

Read Interest, Dividends and Capital Gains for how the three forms differ, Using Life Insurance to Cover Capital Gains Tax at Death for the estate side of an unrealised gain, and Asset Location for arranging the accounts around all of it. The Investment Options guide sets out the whole picture.