Whether you are preparing to sell your property, looking to retire or strategically planning when to sell your investments, the recent conversations about the capital gains inclusion rate will inevitably affect many of your decisions.
As such, now is the time to think about how this delay may be advantageous for you and positively affect your tax planning outcomes.
In simple terms, a capital gain occurs when you sell capital property such as farmland, investments in a corporation and farming equipment at a price that is higher than the original cost that was paid for it.
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Capital gains are subject to a lower tax rate than ordinary income. This is accomplished by only including the taxable part of the capital gain in income, which since 2001 has been one-half of the capital gain.
This inclusion rate has been the topic of recent federal government announcements and is important for farmers to be aware of because of the capital gains they may trigger in the future.
Originally, the federal government announced that the capital gains inclusion rate would increase to two-thirds for individuals with yearly capital gains of more than $250,000 and for all corporate capital gains, effective June 25, 2024.
However, on Jan. 31, 2025, government released a statement announcing it would be deferring this increase, with the effective date now being Jan. 1, 2026.
The change could have implications for tax planning or any future decisions, including but not limited to selling assets such as land or farming equipment, retirement planning, selling investments and paying out any corporate capital dividend account (CDA) balance.
If farmers plan to sell their farmland, farming equipment or any other assets now at a rate of one-half instead of in 2026, when the rate potentially increases to two-thirds, they may be better off because they will have more non-taxable income, which will decrease the amount of taxes they will need to pay annually.
If farmers are planning on triggering a capital transaction within the next two years, they may want to consider triggering that transaction now instead of later because they will have more non-taxable income as compared to 2026 and later.
This will make sure farmers pay less tax on income than if they were to sell in 2026 because their gains could potentially be taxed at the inclusion rate of two-thirds.
The higher the inclusion rate, the more taxable income they will have, and the more taxes they may have to pay.
If farmers have the potential to add to the CDA in their farm company, this could also be affected.
In 2025, 50 per cent of their capital gains will be taxable and 50 per cent can be allocated to their CDA. In 2026, 66.67 per cent will be taxable and only 33.33 per cent can be allocated to your CDA.
Therefore, they may be better off building up their CDA in 2025 rather than in 2026.
As of today, farmers can benefit temporarily from the postponement of the change in the capital gains inclusion rate. Planning ahead is crucial, though, because the new regulations are set to take effect in 2026. Understanding this will help make wise choices now in order to reduce tax obligations in the future and will help ensure a smoother transition when the changes are implemented.
As always, it is important that farmers discuss these options with their trusted tax adviser to aid in their decision-making.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: colinmiller@kpmg.ca. He would like to thank Karrie Geremia and Shane Burdett of KPMG for their assistance with writing this article.
