CRA Challenged in Court on the Proposed Capital Gain Inclusion Rate

Legal challenges against the Canada Revenue Agency (CRA) escalated in January 2025 with two separate lawsuits questioning its authority to enforce the federal government’s proposed capital gains tax increase. The contentious measure, set to apply retroactively from June 25, 2024, was introduced in the April 2024 federal budget and proposed raising the capital gains inclusion rate from 50% to 66.67% for gains exceeding $250,000.

Despite the lack of formal legislation, the CRA has moved forward with implementing the changes, stating on its website, “notwithstanding Parliament is prorogued, the CRA will continue to administer the proposed capital gains legislation.” This decision has sparked outrage and protests from various stakeholder groups, prompting individual taxpayers to file lawsuits against the agency.

On January 31, 2025, the Department of Finance announced that it would introduce legislation in Parliament to implement the proposed changes to the capital gains inclusion rate, with a revised effective date of January 1, 2026. Under this proposal, for dispositions occurring on or after that date, the inclusion rate will increase from one-half to two-thirds for capital gains exceeding $250,000 annually for individuals and for all capital gains realized by corporations and most trusts.

In response, the CRA has reverted to administering the current capital gains inclusion rate of one-half. This means that all capital gains realized before January 1, 2026, will continue to be subject to the existing one-half inclusion rate unless an exemption applies.

The announcement also confirmed that the proposed increase to the Lifetime Capital Gains Exemption (LCGE) limit to $1.25 million remains unchanged. This measure, introduced in the Notice of Ways and Means Motion (NWMM) tabled in Parliament on September 23, 2024, will take effect for dispositions occurring on or after June 25, 2024, with indexation resuming in 2026. The CRA will continue to administer this change accordingly.