In a surprising turn of events, the Canada Revenue Agency is no longer collecting the increased capital gains tax that was proposed in 2024. On January 31, 2025, the CRA released an Update on the Canada Revenue Agency’s administration of the proposed capital gains taxation changes, confirming that the effective date of the proposed capital gains tax increase is being delayed until January 1, 2026.

This is a marked shift from the position that the government took on the proposed capital gains tax less than a month ago. As noted in our recent blog post, Estate Tax Update: CRA Collecting New Capital Gains Tax, Though Not Yet Law, after Parliament was first prorogued, the CRA was still collecting the proposed capital gains tax as if it had already taken effect.

To be clear, this is not an unusual approach for the CRA to take on a proposed tax increase – due to parliamentary convention, a tax is typically collected after the government has tabled a notice of ways and means motion, rather than after the tax has been passed into law. Last year, two notice of ways and means motions related to the proposed capital gains tax were tabled – one in June, and another in September. Even though the CRA was simply following standard procedure by collecting the proposed capital gains tax, the decision to continue collecting it specifically after Parliament was prorogued garnered much criticism for two reasons. First, the legislation was functionally dead because of the Prime Minister’s decision to prorogue Parliament. Second, given that a federal election is expected once Parliament is back in session, it seemed improbable that the tax would actually be enacted, unless the next federal government chooses to re-introduce it.

In fact, shortly before the government announced that the proposed capital gains tax was being delayed, two lawsuits challenging the proposed tax increase were commenced in federal court: see CRA challenged in court cases on capital gains tax increase. One lawsuit, commenced by an individual, asserts that administering the tax increase “violates the rule of law and is unconstitutional.” The second application, filed by a corporation, pleads that the CRA is seeking to collect more than what is allowed under the law by “inappropriately administering the federal Income Tax Act as if the capital gain inclusion rate increase (from one-half to two-thirds) is law.”

If enacted, the proposed capital gains tax would treat 2/3 of a capital gain as taxable income for corporations, most types of trusts, and for individuals who realize capital gains in excess of $250,000 annually. Currently, only one-half of a capital gain is taxable.

Given the decision to delay the proposed tax increase, the CRA is reporting that it “has reverted to administering the currently enacted capital gains inclusion rate of one-half. This means that all capital gains realized before January 1, 2026, will be subject to the currently enacted inclusion rate of one-half, unless an exemption applies.”

Anyone filing a T3 for a trust affected by capital gains tax should take note that the CRA “will grant relief in respect of late-filing penalties and arrears interest” until May 1, 2025. In light of the change in government policy so close to the tax deadline, the CRA is providing “additional time for taxpayers reporting capital dispositions to meet their tax filing obligations.” For affected individuals, the deadline for filing a T1 has been extended to June 2, 2025. There is no change to the deadline for corporations, although the CRA has noted that if any corporation already filed their taxes using the proposed capital gains tax that “the CRA will coordinate corrective reassessments to reverse the application of the two-thirds inclusion rate.”

At this time, the CRA is in the process of preparing new forms with the correct rate – Canadians can expect the updated forms to be issued in the coming weeks.

The government’s decision to delay the proposed capital gains tax is likely welcome news for anyone working on the administration of a sizeable estate. As noted in our first Estate Tax Update, capital gains tax can impact estate administration, although the proposed increased capital gains tax likely would not have been felt by many estates that qualified as graduated rate estates. Such estates were to be exempted for capital gains under $250,000.

Should the proposed capital gains tax be implemented in the future, which remains very unclear at this time, it will be interesting to see whether further exemptions which impact estates will be included. When the delayed implementation of the tax was announced, the Minister of Finance also noted that plans were in the works to introduce further exemptions to ensure that most middle-class Canadians will not be required to pay more taxes.

Thank you for reading, and enjoy the rest of your day!

Suzana.