Prime Minister Justin Trudeau’s announcement this week that he would be resigning after the Liberal Party of Canada selects a new leader, and that Parliament would be prorogued until March 24^th, 2025, created widespread political uncertainty in Ottawa. The latter decision also left several pieces of tax legislation in limbo. The Canada Revenue Agency has since announced that it will continue to administer one of the most significant of those new proposed measures—the increase to the capital gains inclusion rate.

The proposal, which took effect on June 25^th, 2024, increases the capital gains inclusion rate to two-thirds from one-half on annual capital gains for individuals that exceed $250,000. The new rate applies to all capital gains realized by corporations and most trusts on or after that date. The CRA announcement explained its policy to continue implementing the changes, despite the prorogation decision:

“Although these proposed changes are subject to parliamentary approval, consistent with standard practice, the CRA is administering the changes to the capital gains inclusion rate effective June 25, 2024, based on the proposals included in the Notice of Ways and Means Motion tabled September 23, 2024.

… 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 3, 2025.”

The agency is promising that updated tax forms for individuals, trusts and corporations will be made available by January 31^st, 2025—along with additional information in the coming weeks.

The CRA’s guidance has caused confusion among many taxpayers and even some tax professionals. The reason: When Parliament is prorogued, all pending bills technically ‘die’ on the order paper, meaning the legislation must be reintroduced in the House of Commons’ next session if the government plans to proceed with it. But the CRA’s longstanding policy is to immediately administer tax proposals upon their announcement/effective date to mitigate compliance challenges for taxpayers and to reduce the administrative burden on the Agency.

It’s worth noting that the CRA cannot require an individual to file based on proposed legislation that is ‘not beneficial to the taxpayer.’ If they choose not to file based on a proposed measure such as the capital gains inclusion rate hike, the taxpayer may then be subject to interest on any outstanding tax debt, along with potential late-filing penalties, once the legislation receives royal assent.

So, the capital gains measure is definitely moving ahead, right? At the moment, yes—but maybe not for long.

There is a strong chance that the current Liberal government will fall on a vote of non-confidence immediately after Parliament resumes on March 24^th (if not, and the Liberals manage to hold the confidence of the House and continue governing, they could potentially pass this and other pieces of tax legislation). But if the government falls, the new Liberal leader will be required to call an election, most likely in the spring, again putting all federal legislation on hold for several more months. The incoming government would then have the option to move ahead with, or amend, the capital gains inclusion rate proposal in new legislation or ignore it entirely. The Conservatives are currently ahead in the polls and have indicated that they do not support the tax hike. Whether they form the next government—and whether the party’s policy stance shifts in the interim—remains to be seen.

Even if the Liberals were re-elected, the changes would need to be fully reintroduced in the House because they were stalled at the Notice of Ways and Means Motion stage, thereby further delaying royal assent.

So, what’s a compliance-conscious taxpayer to do? Given the uncertainty around this and other tax legislation, along with the government’s precarious hold on power, the lower-risk approach for Canadians who owe extra capital gains tax is to follow the CRA’s guidance and pay the additional capital gains. If the increase is reversed, they could then re-file and seek a refund for the amount of the overpayment.

While it is undoubtedly frustrating to hand over excess funds to Ottawa—even if they might soon be returned—failing to do so could risk an audit and those aforementioned interest payments and penalties. Similarly frustrating will be the time and expense incurred by the many small businesses, individuals and families who made often complex and consequential tax-planning decisions in the run-up to the proposed measure’s June 25^th, 2024 implementation date. There will undoubtedly be some taxpayers who regret those decisions if the policy measure is eventually overturned.

Stay tuned for continued updates from our tax team on the proposed capital gains inclusion rate increase in the days and weeks ahead.

The RH Partners Tax Team

For more information on tax planning and compliance, contact a member of the RH Partners Tax team today.