Due to the resignation of Prime Minister Trudeau, the Canadian Parliament has been prorogued until March 24, 2025. As a result, taxpayers are now in a position of great uncertainty regarding the inclusion rate of capital gains realized after June 24, 2024. With tax season just around the corner, this situation is particularly unfortunate.
What are the Proposed Measures Regarding Capital Gains?
For capital gains realized after June 24, 2024, the proposed tax measures provide an increase of the capital gains inclusion rate from 50% to 66.67% for corporations and most trusts. For individuals and graduated rate estates, only the portion of capital gains realized in the year that exceed $250,000 is subject to the new inclusion rate of 66.67%.
Transition Rule for 2024
For the 2024 transition year, the proposed measures provide that the annual $250,000 threshold is fully available (i.e., it is not be prorated), and that it applies only in respect of net capital gains realized between June 25, 2024 and the end of the 2024 year (less, if applicable, any net capital losses realized between the start of the 2024 year and June 24, 2024).
Why is there Uncertainty?
Prior to Parliament prorogation, the proposed modifications were tabled as a notice of ways and means motion by the Minister of Finance. These changes were not law as no bill to implement them had been adopted by Parliament yet. As such, one could believe that the proposed modifications are not applicable for the time being.
However, there is a longstanding parliamentary convention specific to tax measures. When a notice of ways and means motion is tabled to introduce a tax measure, the measure is considered coming into force at the time provided in the said measure (June 25, 2024 in this case) even though the measure has not been enacted by a bill adopted by Parliament yet. Also, historically, in order to provide taxpayers with better predictability, it has been very common for newly elected governments to reintroduce tax measures announced by the previous government.
In the present situation, the CRA has expressed its intention to apply the above-described parliamentary convention. On its website, the CRA states the following: Notwithstanding that Parliament is prorogued, the Canada Revenue Agency (CRA) will continue to administer the proposed capital gains legislation. The CRA further indicated that it will issue the required tax forms to report capital gains based on the proposed changes by January 31, 2025, and that an interest and penalty relief will be provided to corporations and trusts impacted by the changes that have a filing due date on or before March 3, 2025.
In our view, the CRA’s decision to apply the proposed measures on capital gains is questionable in the present case. The current political context is such that the likelihood of the proposed measures on capital gains to ever be adopted by Parliament is lower than normal. The CRA should have considered this, and a different approach would have been more appropriate in the circumstances.
Indeed, in spite of historical precedents, the present situation is unique considering that the proposed measures impacting capital gains represent a very significant change in the Canadian tax landscape, and that it is almost certain that a general election will take place in Canada very shortly once the new session starts after the end of Parliament prorogation. Depending on which political party wins this election, the next government may very well decide not to reintroduce the capital gain tax measures that were previously announced. In this case, the capital gain inclusion rate of 50% could continue to apply to all capital gains as if no measures had been announced to increase it.
Moreover, from a practical standpoint, it should be noted that the CRA’s income tax audit manual provides that the CRA cannot require taxpayers to file their tax returns on the basis of proposed legislation if that legislation is not beneficial to them. However, if a taxpayer chooses not to apply changes in proposed legislation and if the proposed legislation later becomes law, the taxpayer will be subject to interest on the amounts owing since balance due date (subject to the above-mentioned limited relief announced by the CRA).
What to do Now?
Considering the unprecedented nature of the situation, please speak to your Crowe BGK advisor to review the details of your specific situation and decide on how you would like to report capital gains that you realized after June 24, 2024. Crowe BGK is happy to assist clients who take the position that the inclusion rate remains at 50% in preparing their tax filings.