In the wake of the federal government’s proposal in Budget 2024 to increase the capital gains inclusion rate, affected parties, from higher net-worth taxpayers to business owners and their financial advisors, have been working to take stock of the potential implications of the change, then respond with appropriate tax management strategies.

But with the end of the calendar year looming and tax filing deadlines on the horizon, a new challenge has emerged: how to account for and remit taxes when the legislation to implement these changes has yet to receive royal assent.

Recall that the inclusion rate on annual capital gains of more than $250,000 for individuals—and on all capital gains realized by corporations and most trusts—is being increased to 66 2/3 per cent from the current 50 per cent. As is common practice when a tax change is proposed and expected to become law, the Canada Revenue Agency has begun administering the proposed capital gains inclusion rate legislation, which in this case is being retroactively applied to capital gains realized on or after June 25^th, 2024.

However, due to the delay and uncertainties of this legislation receiving royal assent, the CRA has yet to move forward with updating impacted forms and software.

The CRA has recognized the extraordinary nature of this situation. According to non-official guidance shared in October by Chartered Professional Accountants of Canada Vice-President of Taxation John Oakey, the CRA has reportedly advised taxpayers and tax preparers to not manually adjust tax return calculations to take the new capital gains inclusion rates into account. The reason: CRA says its software has yet to be updated to account for the change. It expects the software update to occur by the end of this year or early in 2025.

Parliament-watchers will note that business has largely been stalled in the House of Commons in recent weeks after the collapse of the Liberal-New Democratic Party Supply and Confidence Agreement, leaving various pieces of legislation in limbo. With the minority Trudeau Liberals vulnerable to a motion of non-confidence at any point, there is a non-zero chance that the government could fall, resulting in the termination or delay (by way of reintroduction in a new parliamentary session) of bills awaiting royal assent. This would include the Notice of Ways and Means Motion to implement the capital gains inclusion rate increase.

As such, the Canada Revenue Agency this week released updated guidance and is providing relief designed to manage the uncertainties swirling around the parliamentary approval of the new capital gains rules. The Agency announced that “… arrears interest and penalty relief, if applicable, will be provided for those corporations and trusts impacted by these changes that have a filing due date on or before March 3, 2025. The interest relief will expire on March 3rd.”

Amended tax forms for individuals, trusts and corporations are expected to be posted to the Canada Revenue Agency website by January 31^st, 2025, however, for corporations and trusts with fiscal years ending after June 24, 2024, tax returns may become due prior to the release of these amended tax forms.

The CRA promises to provide more information in the coming weeks, but at this stage, we have very little detail to share as to how, exactly, this relief will be applied; the corporations and trusts that may qualify for relief; or whether such relief will even be necessary should the government fall, and the Notice of Ways and Means Motion dies on the Order Paper. What is clear is that the CRA is taking steps to mitigate the risk of financial penalty for taxpayers, which is a positive development.

As we wait to see if the legislation will receive royal assent, taxpayers should still assume that the capital gains increase will be implemented and collected as intended. Plan tax and capital gains management strategies accordingly, and then make adjustments, if the parliamentary session ends before the legislation becomes law. The latter scenario is unlikely, but still possible given the government’s minority standing.

The RH Partners Tax Team

For more information on these and other tax measures that relate to your personal or professional financial situation, contact a member of the RH Partners Tax team today.