Canadian Federal Capital Gains Inclusion Rate

Author(s): Scott Douglas Jacobsen

Publication (Outlet/Website): The Good Men Project

Publication Date (yyyy/mm/dd): 2025/04/08

Simon Gaudreault, Chief Economist and VP of Research at CFIB, discusses the federal government’s reversal of the capital gains inclusion rate hike and its implications for small businesses. CFIB welcomes the decision, emphasizing the need for certainty amid economic uncertainties like U.S.-Canada trade tensions. Gaudreault highlights CFIB’s push for a UK-style tax framework that limits provisional tax authority to six months. He stresses the importance of predictable policies for business confidence and investment. The discussion underscores the challenges small businesses face and the necessity of clear, stable tax regulations to support economic growth and entrepreneurship in Canada.

Scott Douglas Jacobsen: Today, we are speaking with Simon Gaudreault, the Chief Economist and Vice President of Research at the Canadian Federation of Independent Business (CFIB). Since joining CFIB in 2011, he has led research and lobbying efforts on economic, political, and social issues affecting small and medium-sized enterprises (SMEs) across Canada. Appointed to his current role in 2022, Simon serves as a national spokesperson and media commentator.

Previously, he worked in municipal finance and economic development. He earned an Honours B.A. in Economics from the University of Ottawa and an M.Sc. in Economics from Université du Québec à Montréal (UQAM), where his research focused on entrepreneurship in Canada’s rural and remote regions.

So, what decision did the federal government make regarding the capital gains inclusion rate?

Gaudreault: The government has decided to reverse its planned increase to the capital gains inclusion rate announced in the 2024 federal budget. As a result, we are reverting to the long-standing policy of allowing only 50% of capital gains to be taxable for most individuals and business owners.

This is a positive decision, especially since the Minister of Finance has confirmed that the government will still increase the Lifetime Capital Gains Exemption (LCGE). Previously set at $1 million, the exemption has now been raised to $1.25 million.

With this change, the government maintains the higher LCGE while returning to the 50% inclusion rate. From CFIB’s perspective, this represents the best of both worlds, as business owners who sell a small business will be able to retain more of their capital gains tax-free due to the increase in the LCGE.

Any capital gains above $1.25 million will continue to be taxed at a 50% inclusion rate instead of the two-thirds (66.7%) inclusion rate planned in the 2024 budget. This is a major victory for small business owners and entrepreneurs in Canada.

Maybe I can combine my next two questions:

Jacobsen: When was the increased capital gains inclusion rate of 66.7% originally scheduled to take effect? How does CFIB react to the government’s decision to cancel the hike?

Gaudreault: Our reaction is, of course, one of relief.

The federal government originally planned to increase the capital gains inclusion rate to 66.7% for gains above $250,000, and this change was scheduled to take effect on June 25, 2024. However, they have now decided to cancel the increase entirely.

When the increase was first announced, we believed it sent a bad signal to entrepreneurs and investors in Canada at a bad time.

We are at a critical moment in our economic history where strengthening the business environment is essential. Canada needs more private investment to boost productivity, ultimately improving all Canadians’ living standards.

So, last year’s government decision to increase capital gains taxes at a time when we should have been encouraging more private investment was concerning.

Now, the government has reversed course and chosen to maintain the 50% inclusion rate, which, in our view, is the right decision given the current economic climate.

Due to ongoing Canada-U.S. trade tensions and the risk of tariffs and counter-tariffs, businesses and entrepreneurs in Canada already face much uncertainty and potentially higher costs. Adding more financial burdens—particularly through higher taxes—would only worsen the situation.

For this reason, maintaining the previous tax regime—especially regarding investment and capital gains—was the right call. Our reaction to the federal government’s decision is overall positive. Additionally, it is especially positive because the government has chosen to retain the modifications to the Lifetime Capital Gains Exemption that were announced last year.

Even though this change represents only a small improvement, it is still a step forward on the investment taxation front. By keeping investment-friendly policies in place, we are creating a better environment for investment and business growth in Canada.

Jacobsen: What uncertainties make it important not to increase taxes on entrepreneurship right now?

Gaudreault: The biggest uncertainty right now is the ongoing Canada-U.S. trade situation. We still do not know whether 25% tariffs will be applied to Canadian goods exported to the U.S. This uncertainty alone has drastically shifted the economic landscape over the past few months.

Additionally, the Canadian government had previously announced its counter-tariffs in response to potential U.S. trade actions. While these retaliatory tariffs have not yet been enforced, we recently received a 30-day reprieve to allow negotiations between the Canadian and U.S. governments.

However, even with this temporary break, there is still no guarantee that tariffs won will not be implemented at the end of the negotiation period. While there are currently no U.S. or Canadian retaliatory tariffs in place, the possibility remains, creating high economic uncertainty.

This morning, I was on a webinar with small business owners discussing the situation. One of them said something that stood out:

“This uncertainty about which goods will be taxed or tax-exempt in the coming weeks, months, and years is almost worse than dealing with tariffs themselves. The uncertainty alone is paralyzing decision-making in business.”

This uncertainty is freezing business activities across multiple areas:

• Investment plans are on hold.
• Hiring is being postponed.
• Expansion projects are delayed.
• Product development is slowing down.

This economic paralysis is already costing Canada heavily, affecting entrepreneurs, businesses, and the overall economy.

Given these circumstances, we should not add burdens, especially by hiking taxes. Instead, we should maintain stability and avoid creating new challenges for businesses.

At CFIB, in the face of trade tensions and economic uncertainty, the government should focus on tax cuts, not increases. While we strongly opposed the proposed capital gains inclusion rate hike, we are relieved that the government ultimately chose to reverse the increase, allowing businesses to focus on growth and stability instead of worrying about higher taxes.

Jacobsen: What specific legislative change would be recommended for the CRA to have the authority to collect taxes?

Gaudreault: Something interesting happened during this episode over the last six to ten months since the capital gains changes were announced. We were in a situation where no bill was ever passed. The government was putting things on the wayside and the back burner.

Although they had stated their intention to increase the inclusion rate, it was never formalized by passing a bill. Even worse, we were dealing with a minority government, and many opposition parties—especially the Conservatives—made it clear that they would not support such a bill. Since they were leading in the polls, they had a high chance of forming the next government.

Then, after Prime Minister Justin Trudeau announced his resignation, the two leading contenders for Liberal Party leadership, Mark Carney and Chrystia Freeland, stated that they would likely scrap the capital gains tax increase altogether.

Despite all this, the Canada Revenue Agency (CRA) said it would continue to enforce the higher inclusion rate announced in the budget, even though it had never been confirmed through proper legislative channels. The formal steps required to confirm this tax change had never been implemented.

We advocate for avoiding this kind of uncertainty in the future. Canada should introduce clear rules that limit the CRA’s provisional authority to collect taxes based on unconfirmed budget proposals. At CFIB, we will lobby the next federal government to introduce legislation similar to those of the United Kingdom. Tax authorities are given no more than six months to pass legislation there. The system automatically reverts to previous tax rates if they are not passed within that timeframe.

The reason for this reform is certainty. Business owners need clear and predictable rules. In this case, we were stuck in the worst possible scenario—the government did not pass legislation, and the opposition and potential new government were strongly against it. Even tax experts were divided, with some saying you could file at a 50% inclusion rate and others suggesting you should file at two-thirds. This uncertainty created a chaotic situation, one of the worst things a business can face.

Even under normal circumstances, uncertainty is one of the biggest challenges for business owners. They want to know:

• If I sell this asset, what will my capital gains tax be?
• How much will I owe the government?
• Can I plan my investments with confidence?

These are critical decisions for business owners and investors, and we cannot afford to be unclear about tax rules—especially not for extended periods like the one we just experienced.

So, we are calling on the next government to ensure that future tax changes must be implemented within six months. If that does not happen, we should automatically revert to the previous tax rules before announcing the change.

Jacobsen: I have two somewhat digressive but related questions I’ll ask simultaneously. First, what factors in policy and economic shifts create the most significant real-time benefits for small businesses—existing ones and those just starting? Second, what psychological or cultural factors—such as how small business owners perceive the economy—are most significant in shaping their confidence to expand, grow, and innovate? So things that reduce anxiety are stuff like that.

Gaudreault: It depends on your specific situation as a business owner—your business model, target market, and where you are in your business life cycle. However, there are a few general factors that we can highlight for sure.

As a business owner, your optimism will largely depend on your perception of predictability in your environment. A stable business environment allows for better decision-making, whether that means stable tax rates or even improving tax policies. A predictable regulatory framework—including labour laws and compliance requirements—is crucial in maintaining business confidence.

On the economic side, business owners need confidence that there will be buyers for their products, that they will be able to access the resources and supplies they need, and that these will be readily available at reasonable costs with multiple options.

Another key factor is certainty in how rules and regulations are enforced. Business owners must know that they operate in a fair system where institutions ensure that contracts are upheld, laws are applied fairly, and regulations are enforced consistently according to democratic processes.

Looking at the past few months—and even up to the last few days—it’s clear that optimism among business owners is not very high. Unfortunately, several major factors have contributed to this:

• The federal government’s back-and-forth stance on capital gains taxes created unnecessary uncertainty.
• The CRA’s interpretation of tax policies left some business owners feeling treated unfairly.
• The broader economic environment—including tariffs, post-pandemic recovery, and high inflation—has made business operations more challenging.

It has been a rough few years for business owners, coming out of the pandemic and dealing with a highly unpredictable economy. Many are exhausted, having had to endure multiple financial shocks.

At CFIB, we track small business confidence through a monthly survey, which we’ve been conducting since February 2009. This data allows us to build a small business confidence index. Over the past several months, confidence among small business owners has remained below historical averages. Given everything I’ve just outlined, it’s not surprising.

We desperately need better news for business owners—and more certainty. Hopefully, we can finally put this capital gains tax issue behind us and focus on creating a more stable and predictable environment for small businesses to thrive.

Jacobsen: What might be the potential implications for future federal legislation on taxes based on CFIB’s lobbying intentions?

Gaudreault: If we succeed in making our case and convincing the next federal government—regardless of the party in power—to adopt a UK-style framework, the impact would be significant.

For example, if we ever had to discuss an increase in the capital gains inclusion rate in the future—though that is certainly not something we want—this system would provide immediate clarity. If a change is announced in the budget but, for some reason, the bill is not tabled in the House of Commons over the following months, there would be no prolonged uncertainty. People would know it cannot remain unresolved for over six months.

This means business owners, investors, and anyone subject to capital gains tax would have a clear timeline. Either the change will be implemented within six months, or it will not happen, and the tax system will revert to its previous state.

This approach would significantly improve clarity, a crucial component of a healthy economy and a stable business environment. That is why we will actively advocate for this policy when we meet with the next federal government after the election.

Jacobsen: Simon, thank you for your time and the opportunity to discuss this today. I appreciate it, and it was nice to meet you.

Gaudreault: Thank you as well. It was a pleasure to meet you. Please don’t hesitate to reach out. If there’s anything else, let us know.

Best of luck with the weather out west, and let’s hope we can get through this winter without freezing too much.

Jacobsen: That’s right. Damn right, Simon. You take care. Bye.

Gaudreault: You as well. Bye.

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