(Bloomberg) -- Canada’s tax authority will continue applying the higher capital gains inclusion rate despite Prime Minister Justin Trudeau’s suspension of Parliament.
Trudeau’s government introduced the change in the 2024 federal budget, increasing the inclusion rate as of June 25 from 50% to two-thirds for all corporations and trusts, and for individuals earning gains above C$250,000 ($175,000), with some exceptions.
The measure, which drew condemnation from business groups, didn’t make it into legislation before Trudeau announced his resignation on Monday and suspended Parliament until March 24. As a result, the increased rate can only become law if a new government reintroduces a bill containing it, but it’s unclear whether that will happen.
Canada Revenue Agency, the federal tax authority, has a standard practice of applying legislation as soon as its proposed, rather than waiting until a bill is passed into law. It has been applying the increased inclusion rate since former Finance Minister Chrystia Freeland introduced a motion in June signaling her intention to table a bill.
That motion passed, but a second motion with amendments meant to address criticism from entrepreneurs died when Parliament was suspended Monday. Still, the tax authority will continue applying the higher rate, the Finance Department confirmed on Tuesday.
“In the event that Parliament is prorogued or dissolved, the CRA will generally continue to administer proposed legislation consistent with its established guidelines,” an official said in an email. “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.”
Dan Kelly, president and chief executive officer of the Canadian Federation of Independent Business, called on new Finance Minister Dominic LeBlanc to “immediately resolve this issue.”
“This political purgatory is untenable,” Kelly said in a post on X. “CFIB is looking at the legality of CRA’s position to date and calls on the agency to revert to the earlier rules, pending a legislative change.”
Many businesses made transactions before June 25 to avoid the higher inclusion rate.
Ali Spinner, tax partner with Crowe Soberman LLP in Toronto, is telling clients to act as if the increased rate is law to avoid potential noncompliance penalties, noting that the CRA currently charges 8% interest on overdue taxes.
“My advice would be to file based on the changed rates and wait,” she said, given that clients can apply for a tax refund if the government definitively reverses course. “The cost of being wrong is too high.”
But Kim Moody, founder of Moodys Private Client and Moodys Tax in Calgary, said the CRA should forgo its standard practice of applying the tax change given that an election is widely expected to be called as soon as Parliament resumes.
“You’re asking Canadians to comply, and it’s likely not going to get passed,” Moody said. “Then you’re going to have to issue refunds and reassessments” — a process that he said can be lengthy.
Trudeau’s main political rival, Conservative Leader Pierre Poilievre, has said he would review the tax hike if elected, but hasn’t committed to scrapping the measure if it became law. The Conservatives are about 20 points ahead of the Liberals in most polls.
The CRA said it will grant arrears interest and penalty relief to corporations and trusts affected by the capital gains changes that have filing due dates on or before March 3.
Several other tax measures were announced by the Liberal government but not yet included in bills, such as clean-energy tax credits and an extended deadline for charitable donations in 2024. They, too, would need to be introduced in a new sitting before becoming law.
--With assistance from Mathieu Dion.
(Updates with comment from the CFIB beginning in the seventh paragraph.)
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