With the federal government officially cancelling the proposed increase to Canada’s capital gains tax inclusion rate, first scheduled to come into effect for capital gains realized on or after June 25, 2024, then delayed to January 2026 before being scrapped altogether, the current tax treatment remains that capital gains are taxed at a 50% inclusion rate, not the proposed two-thirds rate that was previously planned. The CRA is reverting forms and systems to the 50% inclusion rate rule for all dispositions before January 1, 2026.
However, the CRA’s overall enforcement and audit activity still increased significantly in 2025 and will continue to do so, focusing on capital gains and tax compliance broadly. This means taxpayers are under closer scrutiny, and the CRA is actively ensuring correct reporting and compliance under current laws.
Key points
- The capital gains inclusion rate increase was cancelled, so the 50% rate continues until at least January 1, 2026.
- The Lifetime Capital Gains Exemption increase to $1.25 million, effective June 25, 2024, remains in effect.
- CRA enforcement and audits intensified in 2025, with new tools, challenging penalties, and a broader focus on compliance.
- Taxpayers are given relief from late filing penalties related to capital gains reporting until mid-2025 to accommodate confusion caused by the earlier proposed increase.
- The CRA is working to adjust forms and its systems to reflect the cancellation of the capital gains rate hike.
- Taxpayers should remain vigilant in compliance, despite not facing the higher two-thirds inclusion rate.
Increased CRA Audit Activity in 2025 & Moving Forward
The CRA has committed to significantly boosting enforcement and compliance actions, including audits and investigations in 2025 and beyond, deploying new tools and funding to increase scrutiny on various taxpayers, especially small and medium-sized businesses. These enforcement enhancements include the increased use of artificial intelligence (AI) in CRA audit selection and identifying unusual patterns.
Increasing CRA Powers
Also, changes to the Income Tax Act were proposed in Canada’s Budget 2024, with subsequent legislation being tabled to facilitate their implementation. In keeping with CRA’s commitment to step up enforcement actions, these changes aim to provide CRA with greater powers, including:
- Authority to demand documents and sworn interviews under oath, compelling disclosure of more intrusive and potentially privileged information, while increasing the legal risks to taxpayers who make false statements in sworn interviews.
- Ability to impose penalties before reassessment.
- Ability to issue a Notice of Non-Compliance (NoNC) for late or incomplete responses to information requests. Once issued, a NoNC can result in penalties of $50 per day, up to a maximum of $25,000 (500 days).
At the time of this writing, these measures have yet to be officially enacted or enforced; however, it’s likely they will be in the coming months. The legislative proposals that introduced these mechanisms were still in draft form in August 2025, with the government requesting feedback on them up until September 12, 2025. The next steps are:
- With the consultation period closed, the government aims to finalize and enact the legislation, which will come into force upon royal assent of the enacting legislation.
- After enactment, the CRA will update its internal guidance and processes, such as communiqué AD-25-04 (“Obtaining Information During Compliance Activities”), to reflect its new powers and penalties. The CRA has already indicated updates to this guidance.
- Recipients of a NoNC would have 90 days to request a Ministerial review, with the Minister obligated to respond within 180 days. If unsatisfied, the recipient can apply for judicial review within 90 days following the Minister’s decision.
The reassessment period for the taxpayer and related parties is suspended during the duration of the NoNC and any subsequent reviews, allowing the CRA extended time to enforce compliance without typical reassessment timelines applying.
The final official start of these policies depends on the enactment of the legislation following royal assent, expected in late 2025 or early 2026. These proposed changes pave the way for much broader and deeper audits, with taxpayers facing more detailed scrutiny for even minor discrepancies or unfiled taxes.
Increased Use of AI in CRA Enforcement & Audit Flagging
The CRA’s AI Strategy for 2025-2027 focuses on deploying AI for operational efficiency and fraud/tax compliance detection, empowering their staff with AI tools to analyze large datasets to identify systemic issues and tax compliance risks. The CRA completed a major system update in January of 2025 to InfoDec, the main system for processing information on returns. Auditor General reports have noted CRA’s efforts to incorporate AI for predictive analysis in audit selection and fraud detection.
CRA is also piloting chatbots and generative AI to improve call center responses and automate quality reviews, aiming for better accuracy in taxpayer advice.
Key Focus Areas
Capital gains tax on real estate sales and investments, including crypto tax in Canada, remains a prime focus, with the CRA using automated cross-checking and data analytics to spot irregularities faster than ever before. Learn more about how and why the CRA is focusing on non-compliance in real estate.
Businesses in industries like construction and digital services, as well as investors, retirees, influencers, content creators, and OnlyFans models in Canada, are especially noted as at-risk groups for audits.
In short, the CRA’s 2025–26 departmental plan and independent reports confirm a significant expansion of AI usage in tax compliance and enforcement, alongside strengthened audit powers and new penalty regimes, aligned with recent federal budget measures and government announcements.
These developments underscore the CRA’s broader crackdown on tax non-compliance despite the cancellation of the capital gains inclusion rate increase, and highlight the need for taxpayers to be diligent in their reporting and to take advantage of programs like the Voluntary Disclosures Program (VDP). More on that below.
Common CRA Audit Triggers Related to Capital Gains
Reporting Large Investment Income with Inconsistent Deductions
When a taxpayer reports unusually high investment income but claims inconsistent or excessive deductions, the CRA may flag the return for review. Mismatched figures can suggest overlooked income or improperly calculated expenses, prompting a closer look at documentation supporting the deductions claimed.
Selling Real Estate or Crypto Assets without Declaring Gains
The CRA actively monitors property and crypto transactions through third-party data, so unreported gains from sales can quickly raise red flags. Even one missed declaration can trigger an audit or reassessment, particularly when transaction records appear in blockchain or land registry data.
Using Incorrect Adjusted Cost Base (ACB) Calculations
Errors in calculating the adjusted cost base, especially with reinvested dividends, stock splits, or partial dispositions, can lead to understated gains. The CRA frequently audits when the reported ACB deviates from historical data or does not align with brokerage records.
Claiming the Principal Residence Exemption Incorrectly
Improperly claiming the principal residence exemption, such as on a property not ordinarily inhabited or used for rental purposes, is a common audit trigger. The CRA often verifies supporting details like utility bills, occupancy records, and property use before granting the exemption.
Failing to Report Capital Gains from Foreign Assets or T1135 Filings
Taxpayers who own foreign property valued over $100,000 must file Form T1135 and report related gains. Missing or incomplete filings often signal undeclared offshore income, and the CRA cross-references international data-sharing databases to detect discrepancies.
Frequent Securities Trading Resembling Business Income
If trading activity appears excessive or profit-driven, the CRA may reclassify the income as business rather than capital gains. High-frequency transactions, use of margin accounts, or short holding periods often invite scrutiny under this test.
Sudden Changes in Investment Patterns Compared to Prior Years
Sharp increases in trading volume, new asset classes, or abrupt shifts in investment strategy can lead to CRA inquiries. Consistency from year to year helps demonstrate a pattern of legitimate investing rather than speculative or business-like activity.
How to Avoid These Triggers
Keeping Complete Documentation of All Investment Transactions
Maintain organized, detailed records of every investment transaction, including purchase and sale confirmations, dividend reinvestments, and brokerage statements. The CRA often requests supporting documents during reviews, so storing both digital and paper copies ensures quick access if needed. Good documentation also helps verify the accuracy of capital gains calculations and prevent disputes.
Track Adjusted Cost Base (ACB) Meticulously
Use reliable tracking tools or spreadsheets to record the ACB for each security, factoring in reinvested dividends, commissions, and currency conversions. Update your records immediately after each trade rather than waiting until tax season. Being proactive helps you avoid costly calculation errors and ensures consistency with brokerage-reported figures.
Review Tax Slips (T5008, T3, T5) for Consistency Before Filing
Compare all investment slips against your own records to confirm that income and disposition details align. Even minor discrepancies, like missing T5008 data or duplicate entries, can lead to questions. Reviewing slips early gives you time to request corrections from financial institutions before filing.
Work with a Professional Tax Accountant Who Can Flag Discrepancies & Prepare Audit-Proof Records
Our qualified CPAs can identify mismatched figures, missing forms, or deductions that may draw CRA attention. Professionals ensure your capital gains, foreign income, and exemptions are classified properly and are well-supported. Our experience helps create clean, audit-ready returns that withstand detailed CRA review.
Consider Pre-Filing Reviews
A pre-filing review provides an extra layer of assurance by having one of our experts examine your draft return for potential inconsistencies or red flags. This can uncover errors before they reach the CRA. It’s especially valuable for investors with complex portfolios or multiple asset classes.
Making Corrections to Submitted Returns for Any Missed Gains
If you discover a missed capital gain after filing, submit an adjustment request using the CRA’s “Change My Return” service or Form T1-ADJ. Correcting the error promptly shows good-faith compliance and often prevents penalties or deeper audits. It’s best to include supporting documents and a clear explanation for the change.
When to Consider the Voluntary Disclosures Program (VDP)
Even the most diligent taxpayers can make honest mistakes, like forgetting to report a small stock sale, misplacing old records, or overlooking a crypto transaction. The CRA’s systems were already automated and cross-referencing. But now and moving forward, unreported income will be detected like never before.
The Voluntary Disclosures Program offers you a second chance to come forward before that happens, allowing you to fix tax issues without the stress of full penalties or prosecution.
If You’ve Missed Reporting Capital Gains or Foreign Income
Unreported gains, especially from property, crypto, or foreign investments, are common reasons people use the VDP. The program allows you to disclose any omitted income on previous returns voluntarily. Acting before the CRA contacts you can make a big difference: you’ll typically face reduced penalties and avoid criminal charges altogether, provided your disclosure is complete and voluntary.
Why Acting Quickly Matters
Putting aside the substantial increase we are about to see in CRA audits of capital gains and other unreported income, the CRA has also recently made significant Voluntary Disclosures Program changes. Once they begin an audit or investigation, it’s too late to apply for the VDP. Submitting early shows good faith and positions you for the most lenient treatment possible.
The Benefits of Coming Forward
Through the VDP, eligible taxpayers can reduce or eliminate late-filing penalties, avoid criminal prosecution, and gain peace of mind knowing their returns are finally accurate.
Preparing for 2026 and Beyond
Consider scheduling a capital gains audit readiness review or consultation before the 2025 tax season begins. It’s a practical, low-pressure way to confirm your reporting is accurate and that your documentation can back up every figure on your return. Many clients find that a quick review uncovers small issues like outdated ACB tracking or incomplete T1135 details, which are easy to fix now but could be costly later.
At Faris CPA, we help people and businesses stay one step ahead of CRA compliance efforts. Whether it’s clarifying past filings, addressing unreported income, or guiding you through the Voluntary Disclosures Program, our team brings experience and precision to every case.
The key takeaway for 2026 and beyond: don’t wait for the CRA to find an issue. Get in front of it with expert advice that keeps your records airtight, your filings compliant, and your peace of mind intact.
CRA is well on its way to achieving their 2025–2026 plan to bring their investigative methods into the future and start implementing these newer enforcement tools. So compliance, especially on capital gains, is more critical than ever.
If you’ve sold property, traded crypto, or realized capital gains in the past few years, don’t wait for the CRA to reach out. Contact Faris CPA for confidential advice on your reporting obligations or a Voluntary Disclosure review.
