On June 10, 2024, the federal government announced a significant increase to the capital gains inclusion rate, aiming to raise additional revenue. This announcement was followed by the tabling of a Notice of Ways and Means Motion (NWMM) in Parliament on September 23, 2024, formalizing the government’s intention to legislate the increase. However, in a twist that left taxpayers and financial advisors in a bind, on January 6, 2025, Prime Minister Justin Trudeau announced his resignation and advised our Governor General to prorogue Parliament until March 24, 2025.

What Happens During Prorogation?

When Parliament is prorogued, all bills, including those associated with an NWMM, are effectively reset. This means the legislative process must restart in the new parliamentary session unless the NWMM is reintroduced and the corresponding bill is re-tabled in the House of Commons. The bill would then need to pass through the standard stages, including first reading, debates, committee review, and votes before reaching Royal Assent. Consequently, the capital gains inclusion rate changes remain in limbo until Parliament reconvenes and takes action, leaving taxpayers and the CRA operating in uncertainty.

Current Stance of the CRA

Despite the prorogation, the Canada Revenue Agency (CRA) will continue to administer the capital gains inclusion rate increase as if it were already in effect. The CRA has stated it will release updated tax forms by January 31, 2025, allowing taxpayers to file based on the new capital gains inclusion rate. Additionally, the CRA has promised arrears interest and penalty relief for corporations and trusts impacted by these changes that have a filing due date on or before March 3, 2025. However, there is currently no relief for individual taxpayers.

The CRA is adhering to traditional parliamentary procedures. This is consistent with the following parliamentary convention:

“It is the long-standing practice of Canadian governments to put tax measures into effect as soon as the notices of the ways and means motions on which they are based are tabled in the House of Commons, with the result that taxes are collected as of the date of this notice, even though it may be months, if not years, before the implementing legislation is actually passed by Parliament.”   

The Dilemma: What Should Taxpayers Do?

The CRA is updating its forms so that capital gains realized on or after June 25, 2024, will be subject to the new inclusion rate (however, the first $250,000 of capital gains for individuals in a given year will still be taxed under the old 50% inclusion rate).

Taxpayers do have the legal right to file their returns based on enacted legislation rather than proposed measures. The CRA’s audit manual outlines this principle:

“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.”

However, there are risks associated with this approach. If taxpayers choose to file based on the current enacted law, which maintains the 50% capital gains inclusion rate, they may later face reassessment and be charged interest (currently 8% compounded daily) if the new legislation is enacted retroactively. This underscores the need for the CRA to consider providing an interest and penalty waiver for such cases, as noted below.

Conversely, if the legislation does not pass and the 50% inclusion rate remains, those who filed under the proposed changes may need to amend their returns, incurring additional tax filing costs and administrative burdens. This scenario also presents a challenge for the government: they would be required to repay overpaid taxes with interest (currently 6% compounded daily for individuals and 4% for corporations), further straining public finances. Note that the

If you have capital gains of up to $250,000, there’s no need to worry. You will continue to be taxed under the previous capital gains rates. This change only affects individuals with capital gains exceeding $250,000. For any capital gains above this threshold, the amount will be included in taxable income at a rate of 66.67% instead of 50%. Therefore, if you have capital gains above $250,000, please contact your tax advisor for a tailored approach.

To provide clarity on the positions of different political parties regarding the capital gains tax increase, the Federal Conservatives are requesting that the Canada Revenue Agency (CRA) assess taxpayers using the previous 50% capital gains inclusion rate until after the election. The Conservatives also pledge that if they form the government, they will “never allow it to become law.”

In contrast, the New Democratic Party (NDP) is advocating for the swift passage of the higher capital gains tax. They have criticized Prime Minister Trudeau for jeopardizing its full implementation by suspending Parliament. The NDP stated, “We firmly believe that the capital gains tax increase on the top 0.1 percent must go forward so the ultra-rich pay their fair share. Canadians are counting on us.”

A Practical Solution By CRA

A potential solution lies in subsection 220(3.1) of the Income Tax Act, which grants the Canada Revenue Agency (CRA) discretion to waive or cancel penalties and interest. The CRA could establish a policy that allows taxpayers to calculate their capital gains using the previous 50% inclusion rate, while waiving interest and penalties until, for example, December 31, 2025—by which time a new Parliament, with a renewed mandate from the people, would likely be in session.

As a result, taxpayers who file their returns using the old capital gains tax rates will have the option to amend their tax returns if the change becomes law. If the change does not become law, no further action will be required. This approach means taxpayers will avoid unnecessary amendments, and the CRA will not need to issue large interest payments, helping to prevent further national debt.

The CRA has set such precedents before. For example, in the case of bare trust reporting, when the CRA temporarily relieved taxpayers from penalties, it stated:

“In recognition that the new reporting requirements for bare trusts have had an unintended impact on Canadians, the Canada Revenue Agency (CRA) will not require bare trusts to file a T3 Income Tax and Information Return (T3 return)…”

The CRA could adopt a similar approach for the capital gains inclusion rate increase.

What Can You Do?

Taxpayers should not have to bear the cost of uncertainty during this transitional period. There is still time for most taxpayers to file for their 2024 year. In response to public concerns, The CRA has, in the past, made last-minute concessions to address similar situations. Consider reaching out to your local Member of Parliament (MP) to share your perspective on the importance of a CRA administrative policy that could provide temporary relief and foster confidence among taxpayers. As John F. Kennedy once said, “One person can make a difference, and everyone should try.”

For further guidance or to discuss your specific situation, reach out to a tax professional.