Context
The Prime Minister of Canada announced on January 6, 2025, that the Governor General agreed that Parliament would be prorogued until March 24, 2025, and that the Prime Minister would resign once a new party leader is selected. Under Canadian law, the prorogation of Parliament effectively stops all parliamentary business. As a result, any government bills that have not yet received Royal Assent are considered to cease to exist, and government committees will not sit again until prorogation ends.
In other words, as a result of the prorogation, any outstanding government bills that have not yet received Royal Assent are considered to have "died on the order paper" and no longer exist. To be passed, these bills must be reintroduced as new bills (or reinstated, if the House agrees to this) in the next session of Parliament.
The increase to the capital gain inclusion rate was not enacted before prorogation, which resulted in uncertainty for many affected individuals and entities.
Capital Gains Inclusion Rate (and Stock Option Deduction)
The Budget increased the inclusion rate for capital gains realized on or after June 25, 2024 (for prior coverge, see GMS Flash Alert 2024-101, May 1, 2024). In particular, the Budget proposed increasing the inclusion rate for individuals to 2/3 (from 1/2) on the portion of capital gains realized after June 25, 2024, that exceed $250,000. (All dollar figures expressed are Canadian dollars.) For corporations and trusts, the inclusion rate was increased to 2/3 (from 1/2) for which there is no $250,000 threshold. The change in the capital gains rates is to apply to any dispositions of assets, including deemed dispositions on a departure from Canada or death. However, in its recent announcement, Finance notes that this $250,000 threshold will now be effective January 1, 2026. Conversely, the increase to the Lifetime Capital Gains Exemption to $1.25 million (from $1,016,836) on the sale of small business shares and farming and fishing property is proposed to be effective June 25, 2024.
The Canadian Entrepreneurs’ Incentive is proposed to take effect starting in 2025 and the maximum amount will increase by $400,000 each year, reaching $2 million in 2029.
For individuals, the Budget also proposed decreasing the deduction rate for stock options to 1/3 (from 1/2) on stock options exercised after June 25, 2024. The news release from the government that deferred the capital gains changes until January 1, 2026, did not reference the deferral of proposed change to the stock option deduction rate. However, as the stock option amendments were presented largely as consequential amendments to the capital gains inclusion rate changes, we expect the deferral to apply to the stock option amendments as well.
