The federal government has provided clarity on how proposed changes to capital gains taxes will work after Prime Minister Justin Trudeau prorogued Parliament without passing legislation to put the new tax rules into law.
But tax experts warn that until it’s clear which party will form government this year in Canada’s upcoming federal election, the answer to how Canadians should handle capital gains and other proposed tax changes remains murky at best.
Back in the 2024 budget last spring, the Liberals introduced plans to raise the inclusion rate — how much of the proceeds from an asset’s sale are subject to tax — to two-thirds, up from 50 per cent, on all capital gains earned over $250,000 annually. That inclusion rate would also rise to two-thirds for all gains made by corporations and many trusts.
The changes were set to affect all capital gains realized after June 25, 2024. Capital gains can result from the sale of an asset like a stock or a secondary property such as a cottage, but Canadians’ primary residences remain exempt from capital gains taxes.
The measures were billed as a way to improve tax fairness and were a pillar of the budget, allowing the Liberals to fund other proposed spending plans.
The Liberals separated the capital gains tax changes from other items in the budget bill and tabled the proposals as a notice of ways and means motion in September. But the minority government failed to pass the formal legislation enshrining the capital gains tax changes in law amid a Conservative filibuster in the fall.
Trudeau’s move to prorogue Parliament until March 24 — suspending the business of lawmaking as the Liberals seek a successor to the outgoing prime minister — leaves all unpassed legislation in limbo.
What the CRA says about capital gains
A Department of Finance official told Motorcycle accident toronto today in an email on Tuesday that the Canada Revenue Agency will continue to administer the capital gains changes as directed by the September tabling.
“Parliamentary convention dictates that taxation proposals are effective as soon as the government tables a Notice of Ways and Means Motion; this approach provides consistency and fairness in the treatment of all taxpayers,” the official said in an email.
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That won’t change because of Parliament’s prorogation, but could be affected if an election is held and a new government is formed when the House of Commons returns in the spring.
“In the event that Parliament is prorogued, or dissolved, the CRA will generally continue to administer proposed legislation consistent with its established guidelines,” the official said.
“Upon resumption of Parliament, if no bill is passed in the House of Commons, and the government signals its intent to not proceed with the proposed measures, the CRA would cease to administer them.”
John Oakey, vice-president of taxation with CPA Canada, told Motorcycle accident toronto today on Tuesday that this is consistent with an “unwritten rule” for how tax changes are administered in Canada.
Because tax filing deadlines and proposed changes can “overlap” with elections and other political upheaval, the CRA will prepare each filing season based on the “intent” of any tax-related motions tabled in Parliament, he explained.
“It’s there to try to ensure there’s some level of stability in the marketplace with regards to any tax legislative changes,” Oakey said.
Jamie Golombek, the managing director of tax and estate planning with CIBC Private Wealth, also told The Canadian Press that the CRA informed accountants last year that it would follow “standard practice” and start applying the proposed measures on capital gains realized on or after June 25, 2024, even though legislation hadn’t passed.
Oakey said this isn’t an outcome that the CRA chose — the agency is following the last intention it received from Parliament and standard operating procedures.
“I know there’s going to be a lot of people out there saying, ‘Well, you know, now that the government’s prorogued, we should just cancel capital gains thing and just go back to the way it should have been.’ Well, CRA doesn’t really have that option,” he said.
There are other tax measures applicable for the previous tax year that have also yet to pass into law, including changes to alternative minimum tax provisions, disability support tax deductions and changes to the Scientific Research and Experimental Development tax credit program.
Oakey called the current scenario a “perfect storm,” where a minority government was stymied from passing any legislation for months on end, and then capped off any chance of getting the changes enshrined in tax law by hitting the prorogation button, which means any bills not already passed die.
It’s a “really bad situation” for the CRA to be in, Oakey added.
“I would say this is not a typical scenario. This is a scenario that occurs when you have minority governments and when you have a level of uncertainty in Parliament during a period of time where you’re leading up to tax filing positions,” he said.
What should Canadians do on their taxes?
The CRA is readying its forms for the 2025 tax filing season in accordance with the higher capital gains inclusion rates.
But Oakey said Tuesday that Canada’s tax system is based on self-assessment, meaning it’s ultimately in the hands of Canadians how they claim taxes on their returns — whether they abide by the previous 50 per cent inclusion rate or used the higher two-thirds rate.
This comes with various risks. If someone files their taxes based on the proposed higher rate and the legislation is not reintroduced or is reintroduced but does not pass before an election, they will likely have the revise their return at a later date.
Oakey said this can be done manually or an automated process via the CRA, but it’s not clear yet which tactic the agency would take.
Alternatively, opting to file based on the inclusion rate of 50 per cent risks under paying taxes owed to the government if the Liberals’ proposed capital gains legislation is passed when Parliament returns, or by another party that takes over after the election, which must be held no later than October 2025.
Golombek is suggesting clients prepare to pay the higher capital gains taxes. He reasons if the legislation doesn’t pass, anyone who pays will likely get a refund, but if it later passes and you didn’t pay, you could be hit with interest fees for being late.
Oakey also said that risks are tilted towards having to pay interest for underpaying on capital gains taxes should the legislation also pass.
He advised against making any “rash” decisions while filing for the 2024 tax year, and added that many Canadians will have to sit down and talk to their accountants to figure out “the best avenue” through the current uncertainty.
Oakey also warned about the risks of delaying transactions or succession planning indefinitely just because the exact tax rate is up in the air right now.
“You know the old expression, Don’t let the tail wag the dog,” he said. “At the end of the day, the transaction itself is more important than the tax results that come from it.”
— with files from The Canadian Press