The lawsuit was filed by an Ontario resident on Friday
An Ontario resident filed a lawsuit Friday to challenge the Canada Revenue Agency’s decision to enforce a capital gains tax hike despite the prorogation of Parliament, arguing that the agency can’t make such a decision without parliamentary authorization.
Devin Drover, who represents the plaintiff as Atlantic director and general counsel of the Canadian Taxpayers Federation, told Canadian Lawyer that he is not aware of any other lawsuits challenging the policy.
“From our perspective and from the perspective of Canadian taxpayers, what we're seeing is the CRA going basically beyond their function, and going above and beyond the function of our Democratic representatives in the House of Commons, and enforcing a tax hike that Parliament never actually passed as legislation,” Drover says.
“We have significant concerns about the rule of law applicable in this case, where we're seeing essentially unelected bureaucrats going above and beyond the powers given to them and enforcing tax changes that [were] never authorized by law.”
The federal government introduced the proposed capital gains tax changes in its 2024 budget last April. Under the proposal, the capital gains inclusion rate – i.e., the proportion of capital gains that counts as taxable income – would increase from half to two-thirds. The new rate would apply to capital gains worth more than $250,000 for Canadians, and to all capital gains for corporations and most types of trusts.
In June and September, then-Minister of Finance Chrystia Freeland tabled notices of ways and means motions with draft legislation to implement the new inclusion rate.
In November, the CRA announced that it would begin implementing the new inclusion rate effective June 25, 2024. Prime Minister Justin Trudeau prorogued Parliament on January 6, effectively terminating all unfinished business at the House of Commons, including the second ways and means motion.
Vorstfeld v. Attorney General of Canada seeks an order to stop the CRA from enforcing the new rate hike. The federal lawsuit asked the court to rule on the matter before the CRA’s April 30 tax filing deadline.
The CRA has a long-standing policy of asking taxpayers to file their taxes based on proposed tax legislation – a practice that has historically garnered little controversy because most proposed bills have gone on to receive Royal Assent. Many critics have argued that the practice is less sound when applied to the capital gains tax hike, given the uncertainty stemming from Parliament’s prorogation.
However, Drover argued that “regardless of the circumstances, [the practice has] always has been an illegal or an unconstitutional act.
“What makes it a little different in this circumstance in particular, is we haven't seen such a long time period elapse between a proposal for a tax change being raised in the House of Commons and a failure of Parliament itself to pass tax legislation.”
Drover says he’s spoken with other individuals, organizations, and businesses that are interested in challenging the new inclusion rate. He says he also anticipates parties looking to intervene in the case.
“We want the federal court to make a decision very soon on whether or not the CRA’s policy does comply with the rule of law and does comply with the constitution,” he says.
“We think, especially in this case, it does not. But we're looking forward to the decision of the court in this case and hopefully setting a precedent so this doesn't happen again in the future.”
The Attorney General of Canada and the Canada Revenue Agency did not immediately respond to requests for comment.
