The federal government said Friday it will defer the tax change's effective date to January 1, 2026
A week after tax organizations filed two lawsuits challenging the Canada Revenue Agency’s decision to enforce a capital gains tax increase, the Department of Finance Canada announced it will move the tax hike’s effective date from June 25, 2024, to January 1, 2026.
“The deferral of the increase to the capital gains inclusion rate will provide certainty to Canadians, whether they be individuals or business owners, as we quickly approach tax season,” Canada Minister of Finance and Intergovernmental Affairs Dominic LeBlanc said in a statement.
“Given the current context, our government felt that it was the responsible thing to do,” LeBlanc added.
According to the Department of Finance, the government plans to introduce legislation on the capital gains inclusion “in due course.”
Devin Drover, Atlantic director and general counsel of the Canadian Taxpayers Federation, told Canadian Lawyer Friday that while the organization welcomed the decision, it will continue to pursue its lawsuit against the government.
“While it is less likely to be heard now on an expedited basis, we will keep pushing forward … to set a firm precedent that the CRA’s decision in this case was unconstitutional and violated the constitutional provision set out in s. 53 of the Constitution Act, 1867, that there should be no taxation without representation,” Drover says.
Lawyers from Thorsteinssons LLP, the tax firm that filed another lawsuit challenging the tax hike on behalf of a British Columbia company, did not immediately respond to a request for comment.
However, one of the lawyers, David Davies, told Bloomberg early Friday that the firm would withdraw its challenge.
In its 2024 budget last April, the federal government proposed increasing the capital gains inclusion rate – i.e., the proportion of capital gains that counts as taxable income – from half to two-thirds. Under the proposal, the new rate would apply to capital gains worth more than $250,000 for Canadians and all capital gains for corporations and most types of trusts.
In the summer and fall, then-Minister of Finance Chrystia Freeland tabled notices of ways and means motions with draft legislation to implement the new inclusion rate. The CRA announced in November that it would start enforcing the new inclusion rate effective June 25, 2024.
Prime Minister Justin Trudeau prorogued Parliament on January 6, terminating all unfinished business at the House of Commons. The CRA’s decision to continue enforcing the tax hike even though it never officially became law left taxpayers uncertain about how to report their capital gains ahead of the April tax filing deadline.
In its lawsuit, the Canadian Taxpayers Federation argued that the CRA did not have the authority to implement a tax hike that had technically not been authorized by Parliament.
Thorsteinssons’ lawsuit posed a similar argument, alleging that the CRA began enforcing the capital gains tax hike “despite the manifest uncertainty over whether the proposals would ever be enacted (or even contained within a bill tabled in Parliament).”
