The capital gains inclusion rate proposals first introduced in the April 16, 2024, federal budget are on life support because of the political chaos that Canada is currently experiencing.  The January 6, 2025 delayed resignation of the Prime Minister accompanied by a prorogation of Parliament further confirms this. When Parliament is prorogued,  all government bills and other items of business in progress “die on the Order Paper”— this includes bills and notices of ways and means motions.

 

While a new session of Parliament can re-introduce the bills at the stage they were at with the unanimous consent of Parliament, notice of ways and means motions must be re-introduced.

 

The capital gains proposals never made it past the NWMM stage so it would have to be reintroduced.  Given the uncertainty, it’s highly likely the capital gains proposals will never be passed.

 

I have also previously provided my thoughts on the fact that the Canada Revenue Agency recently commented that it would continue to apply the proposed capital gains increases even if an election is called.  I disagree with that as explained further below.

 

Since I wrote the above, there have been numerous other people commenting on this issue including other articles, social media posts and podcasts that the “rule of law” is not being respected by the CRA, PM Trudeau is forcing this collection of tax dollars because his government needs the money and other nonsense.  This is simply wrong and the stuff of conspiracy theories.  While I am no fan of this current government because of its poor tax and economic policies, the CRA’s administrative policies on this issue have little, if anything, to do with politics.

 

Why?  Well, it is very common in Canadian tax law for new proposals to have immediate effect upon announcement (or some future date as announced).  There are very good reasons for this including trying to ensure the perceived “mischief” that the tax proposal is aiming at takes immediate effect.  Or a new policy – like the capital gains inclusion rate increase – takes effect as of a certain date. Becoming effective law, however, takes time. Often it can take months or in some cases years to receive Royal Assent.

 

The CRA has a decades old administrative policy to ask taxpayers to file on the basis of proposed legislation. This practice is intended to ease the compliance and administrative burdens on taxpayers and CRA. However, the CRA generally waits until the measure has been enacted before reassessing taxpayers if the proposed legislation results in an increase in benefits or if a significant rebate or refund is at stake.

 

In my view, there is nothing controversial about this long-standing practice of the CRA.  In fact, I think it is proper and grounded in Parliamentary convention.  And for those wondering, yes, retroactive tax legislation is also proper and legal and has a long-standing history, tradition and judicial support.

 

I guess one could quibble that the CRA won’t enforce beneficial amendments that result in rebates / refunds but they will enforce proposed tax legislation that requires additional tax.  But even with that, the CRA’s Audit Manual which instructs CRA auditors on how to deal with proposed legislation states the following at Chapter 12 paragraph 3.5:

 

“…if the proposed legislation is not beneficial to a taxpayer, the CRA cannot require them to file on the basis of proposed legislation. In such cases, inform the taxpayer that they are responsible to apply the legislation according to the enacted legislation after royal assent, and that they may be subject to interest on amounts owing.”

 

Again, I think that is a reasonable approach.

 

So, with the above in mind, why do I disagree with the current position of the CRA regarding the capital gains proposals?  Well, it’s simple.  The long-standing policy of the CRA – as outlined above – makes sense for most situations.  However, like most things in life, a one-size-fits-all approach may not always be appropriate.  If an election is called, it is highly probable (obviously nothing is guaranteed in elections), that a new governing party – the Conservatives – will take over.  They are on record saying they do not support the proposals.

 

Accordingly, if the proposals die because of an election call, it would be more appropriate for the CRA to “read the room” better to assess whether their long-standing blanket policy needs adjustment. I think a better approach for the CRA on this matter would be to stop encouraging taxpayers to comply if an election is called regardless of the reasons why an election is triggered.  Instead, repeating the warning in chapter 12 of the audit manual above would be more broadly appropriate.

 

If the Liberals and / or NDP form the next governing party, then I think it would be appropriate for the CRA to re-start encouraging compliance with the capital gains proposals.  Given today’s circumstances, however, that is highly unlikely. To continue to apply a one-size-fits-all policy in these unusual circumstances would require subsequent adjustments and refunds to be issued if the proposals permanently die.  This would fly in the face of the reasons for the CRA’s long-standing policy to ease overall burdens.

 

For tax professionals advising their clients, well, there is no risk-free advice.  If you advise your clients to follow the CRA’s long-standing policy, such taxpayers may end up having to amend their tax returns and seek refunds if the capital gains proposals permanently die.  If you advise them to not follow the CRA’s recommendations, well, they could end up owing additional tax, interest and penalties if the proposals indeed move forward.  Having said that, it’s my opinion that professionals have a moral and ethical obligation to also “read the room” and advise their taxpayer clients accordingly.

 

An old Chinese proverb states, “A wise man adapts himself to circumstances, as water shapes itself to the vessel that contains it”.  

 

Lots of wisdom in that old proverb. In my view, the CRA’s policy for the capital gains proposal needs a more adaptive approach in the current circumstance.  And it would go a long way to eliminating the unfortunate and misleading rhetoric on this issue that we’re seeing.