The new capital gains tax that was proposed by the federal government in 2024, but has not yet been passed into law, made headlines last week after Parliament was prorogued. The Canada Revenue Agency announced that it will still proceed as planned and collect the new capital gains tax, as per its “standard practice” of applying legislative changes as soon as they are proposed, rather than waiting until the bill is actually passed into law: see Tax Tips 2025 in the CRA Newsroom. This news may be pertinent for estates as of June 25, 2024, the date that the new capital gains inclusion rate took effect, although estates may be exempt from the increased tax for another 36 months, as explained below. 

The new capital gains inclusion rate

We first discussed the proposed changes to the capital gains tax in April of 2024: see Upcoming Changes to Capital Gains Tax. Under the legislation that is currently in force, only 50% of a capital gain is considered taxable income. Typically, capital gains tax is payable on capital gains or profits earned from selling assets such as stocks, a business, or real property. Under the proposed changes to the legislation, 2/3 of a capital gain is taxable income under specific circumstances.

For individuals, the increased capital gains tax applies to capital gains realized in one year which exceed $250,000. Individuals who realize capital gains under $250,000, including capital gains realized either directly or indirectly through a trust or partnership, will still only be taxed on 50% of the capital gain.

Corporations and most types of trusts, in comparison, are taxed on 2/3 of capital gains under the new proposed law, although there is an exception for two types of trusts – graduated rate estates and qualified disability trusts. These types of trusts receive the same exemption on capital gains under $250,000 that individuals receive, meaning they are only taxed on 50%, rather than 2/3, of such capital gains.

Capital gains applicable to estates

Determining how much capital gains tax an estate must pay can be complicated. The starting premise is that the assets of the deceased taxpayer are deemed to be disposed of at fair market value upon the taxpayer’s death, unless those assets are left to the deceased’s spouse. Capital gains tax will be payable on income derived from the deemed disposition of the taxpayer’s capital assets as long as the fair market value of the asset at the time of death is higher than its purchase price. While there is an exemption for the taxpayer’s principal residence, this exemption does not extend to investment properties, meaning such properties may incur a significant tax bill. Similarly, capital gains tax may be a concern for estates with substantial investment portfolios, as capital gains tax must be paid on income earned from the deemed disposition of stocks, bonds, and mutual funds, plus cryptocurrencies and digital assets.

However, as previously noted, estates that qualify as a “graduated rate estate” will get a break on the new capital gains tax, at least temporarily. The term “graduated rate estate” refers to an estate which meets a number of conditions, including:

• no more than 36 months have passed since the death of the taxpayer;
• the estate at that time is a testamentary trust; and
• the estate designates itself as the graduated rate estate of the taxpayer in its T3 return, and uses the taxpayer’s social insurance number on each tax return during the 36-month period.

After the 36-month period ends, however, the estate will be subject to the increased capital gains tax applicable to other types of trusts. Even during the 36-month “graduated rate estate” period, an estate will be taxed on 2/3 of capital gains that exceed $250,000 under the proposed capital gains tax. The first $250,000 of such gains still ought to be taxed at the lower rate though.

Proroguing Parliament did not “kill” the proposed capital gains tax

After news that Parliament was being prorogued broke, initially there was speculation that it would “kill” the new capital gains tax, as prorogation typically kills all bills and motions yet to receive royal assent. However, the proposed tax will instead remain in limbo while parliament is prorogued, and the CRA will continue to collect taxes under the proposed capital gains tax. As noted in this CBC article, the Department of Finance was already collecting capital gains tax at the new, higher rate before Parliament was even prorogued.

While the actual capital gains tax has not been passed into law yet, the House of Commons did pass a ways and means motion in June of 2024, signaling the government’s intent to table a bill to approve the changes to the tax. Another Notice of Ways and Means Motion was subsequently tabled on September 23, 2024, in order to introduce the technical changes to the Income Tax Act and regulations, but to date no bill has been passed. In early October, the federal government proposed putting the capital gains measure to a confidence vote, but the vote was delayed, as reported here.

At this point, it remains uncertain whether the new capital gains tax will actually be passed into law. To do so, it appears that the government would first have to reintroduce the capital gains legislation, either after Parliament resumes or after a federal election is held, at which point the legislation would have to be passed. Given the current political climate, this seems improbable, but certainly is not impossible.

The bottom line for wills and estates practitioners is that the CRA is applying the increased capital gains tax to estates, even while the tax remains in limbo. For “graduated rate estates” that realize capital gains greater than $250,000, or for estates that do not qualify as “graduated rate estates,” the impact of the new capital gains inclusion rate could be quite significant.

Enjoy the rest of your day,

Suzana.