Taxpayers are frustrated with decisions they've made based on the rules, which may be rescinded
Following Prime Minister Justin Trudeau’s prorogation of Parliament this month, the Canada Revenue Agency’s decision to uphold its policy of immediately enforcing proposed tax legislation has left many taxpayers frustrated and scrambling to decide how to report capital gains, tax lawyers say.
Last April, the federal government introduced the capital gains taxation changes in its 2024 budget. The changes went into effect on June 25, increasing the so-called inclusion rate – i.e., the proportion of capital gains that qualifies as taxable income – from half to two-thirds. This new rate applies to capital gains worth more than $250,000 for Canadians, as well as all capital gains for corporations and most types of trusts.
Legislation formalizing the policy was tabled in the fall. However, it did not receive Royal Assent before Trudeau announced the prorogation of Parliament on Jan. 6. Because Trudeau’s decision effectively nullified most pending bills, the capital gains legislation will need to be reintroduced in the next session of Parliament to become law.
But this scenario is not guaranteed when Parliament resumes sitting in March. Polls showing growing support for the Federal Conservative party – which called the capital gains tax hike “disastrous” in an open letter to federal Finance Minister Dominic LeBlanc on Tuesday – have prompted predictions of a Conservative government following the next federal election.
Despite this uncertainty, the CRA continues to enforce the new capital gains inclusion rate, in keeping with the agency’s long-standing policy of asking taxpayers to file their taxes based on proposed tax legislation. Historically, this practice has garnered little controversy, says Ben Hudson, a partner at Gowling WLG who specializes in tax, corporate, and commercial law. Within the last 10 to 15 years, for example, “most of the proposed legislation [did] come into force and receive Royal Assent at some point,” Hudson says. “Not all, but quite a bit.”
Jonathan Willson, a partner in the tax group at Stikeman Elliott, says that in cases where proposed tax legislation involves a tax increase, implementation typically starts the day the legislation is announced. This practice is meant to ensure efficiency and fairness so taxpayers can’t engage in strategic tax planning or tax-motivated transactions before a tax rate goes up.
The CRA enforcing proposed legislation that is not officially law yet is, therefore, not new. What sets the capital gains inclusion rate apart is the uncertainty around the future of the legislation introduced by Trudeau’s prorogation of Parliament. The possibility that the bill will not be reintroduced has left many taxpayers uncertain about how to file their taxes or frustrated by decisions they’ve made based on the government’s introduction of the capital gains tax hike.
In the two months between announcing the changes and enacting them last June, for example, “a lot of people carried out transactions to realize capital gains, sold investments, or did different things to actually trigger the tax at the lower rate before the changes came in,” Hudson says. Many of these people are frustrated that they now must pay taxes on transactions that they might have refrained from if a tax hike wasn’t looming, he adds.
Meanwhile, taxpayers reporting capital gains realized after June 25th essentially have two awkward options. The first is to file their taxes in accordance with the proposed legislation and pay higher taxes. If the proposed legislation never becomes law, a taxpayer who chose this route can ask the CRA for a refund of the extra tax they paid, but “there isn't an easy way for CRA to do that without that taxpayer having to file an amended return or to object and start a tax litigation process,” Willson says. “It really could be a time-consuming and frustrating experience for a taxpayer who complies.”
The second option is to “comply with the letter of the law as it reads now, which is that only one-half of capital gains are included in your income,” Willson says. If the proposed legislation does become law, however, taxpayers who choose this option risk having to pay interest on the amount they still owe to the CRA.
“The taxpayer’s a little bit damned if they do and damned if they don't,” Willson says.
Neither Willson nor Hudson believe that the CRA would impose penalties on taxpayers who follow the second option. For Hudson, however, frustration around the capital gains rule is compounded by a more general uncertainty around tax rules in recent years, when policy changes were accompanied by little practical guidance. He cited trust reporting rules that were set to be enforced for the 2024 tax season. In response to confusion around the requirements, the CRA announced exemptions for bare trusts days before the filing deadline.
A survey last year estimated that accountants and their clients spent nearly $1 billion trying to comply with the rules before they were rescinded.
“In my view, what a lot of [these policies] have done is just increase the average person's cost to have their accountant prepare their taxes without really adding value for anyone,” Hudson says.
