The federal government on Friday pushed the date on which a capital-gains tax hike would take effect to Jan. 1, 2026.Sean Kilpatrick/The Canadian Press
Allan Lanthier is a retired partner of an international accounting firm and has been an adviser to both the Department of Finance and the Canada Revenue Agency.
The federal government’s proposed increase to the capital-gains tax has long been a fiasco.
The proposal in last year’s budget was never tabled as a bill in Parliament, let alone enacted, then Parliament was prorogued in early January. Yet the Canada Revenue Agency said at the time it would administer the proposal as though it had been enacted, leaving taxpayers in a quandary about how to proceed. Then there was further quandary.
The Conservative Party has long opposed the capital-gains tax hike. Then some of those vying to become the next leader of the Liberal Party signalled they oppose the measure, too, including front-runner Mark Carney, former finance minister Chrystia Freeland, who once championed the increase, and former government House leader Karina Gould.
It seemed clear the proposal was dead. So the government was right to finally back away from the new capital-gains rules and put a pause to administering them, as it announced on Friday. The Department of Finance pushed the date on which the tax hike would take effect to Jan. 1, 2026, by which point we would have had an election and a new government.
But what took Ottawa so long?
As a refresher, the 2024 federal budget said the government would increase the taxable portion of capital gains from one-half to two-thirds effective June 25, 2024. The rule would apply for all capital gains realized by corporations and trusts. For individuals, only gains above $250,000 a year would be subject to the higher inclusion rate. Then everything fell apart.
The government refused to produce documents related to alleged mismanagement and conflicts of interest at its failed green technology fund, and parliamentary business came to a screeching halt.
Parliament was prorogued, and now an election is expected shortly after a new session begins March 24.
Nonetheless, the CRA said at the time that, “consistent with standard practice,” it would administer tax filings for 2024 as though the capital-gains increase would be enacted. So what were taxpayers to do? File their tax returns and pay the tax at the higher inclusion rate, knowing they would almost certainly have to seek refunds in due course? Or file on the basis of enacted law and face the risk of tax assessments for additional tax, interest and penalties?
This is hardly a new issue – how to administer tax measures that, while proposed, have not been enacted. It has been with us since 1917, when income tax was introduced in this country. In fact, in 1913, British courts stated there could be no assessment or collection of tax without a law enacted by Parliament. U.K. court decisions carry considerable weight in Canada.
In 1985, Finance Minister Michael Wilson issued a discussion paper dealing with the Canadian budgetary process, including the implementation of tax changes proposed but not yet enacted. The paper noted that, until a law is enacted, there is no legal requirement to pay, nor any legal authority to collect, a proposed tax, but taxpayers are still expected to voluntarily pay. And in the case of proposed tax decreases, refunds are delayed and taxpayers sometimes have to borrow until enactment.
Mr. Wilson proposed the introduction of new legislation that would explicitly allow for the provisional implementation and collection of proposed taxes – including the imposition of interest and penalties – prior to their enactment, for a fixed period of time. He proposed a limit of 180 sitting days in the House of Commons; if changes had not been enacted by then, the provisional implementation of taxes would end.
These proposals went nowhere and, in 2025, Canada finds itself in the same position as 1917. There are simply no rules telling us what to do when a new tax has been proposed but has not yet been enacted.
Two taxpayers had enough of these shenanigans and petitioned the Federal Court on Jan. 24 asking it to prohibit the CRA from administering the capital-gains tax proposal. One is a private company in British Columbia, and the other an individual in Ontario; both realized capital gains after June 25, 2024, that would be subject to the proposal if enacted.
These court challenges are no longer necessary. The fiasco has come to an end. But the fact remains that it took the government far too long to do its job.