The Peace Tower on Parliament Hill in Ottawa, on Jan. 6.Patrick Doyle/Reuters
Daryl Ching is the founder and owner of Vistance Capital Advisory, which provides accounting, capital raising and financial management services to small and medium-sized companies.
Assuming the role of the government is to act in the best interest of the people it serves, Ottawa needs to pause the new capital-gains tax rules.
As we head into tax season, we are confronted with a major uncertainty about those capital-gains rules, as Parliament shuts down until March 24 after it was prorogued at the request of Prime Minister Justin Trudeau.
Mr. Trudeau’s government had proposed an increase in the inclusion rate from 50 per cent to 66.67 per cent for capital gains, or for individual capital gains over $250,000, coming into effect June 25, 2024. The proposal was never passed in Parliament. However, a long-standing practice to follow draft legislation means the Canada Revenue Agency is still proceeding with the new rules. The government reiterated that stance on Tuesday.
It can be argued that at the time the measure was introduced, following draft legislation was a reasonable move. Mr. Trudeau’s minority government held the confidence of the House of Commons, however shakily, and was likely to eventually pass the legislation.
That situation has changed. Mr. Trudeau’s Monday announcement that he will resign had been precipitated by the high-profile resignation of former finance minister Chrystia Freeland and opposition parties pushing for a vote of non-confidence. When a new parliamentary session begins in March, we do not know if the government will still stand.
Uncertainty around capital-gains tax clouds fiscal outlook for Ottawa, provinces
Capital gains tax uncertainty leaves taxpayers facing two unappealing options
When the new capital-gains tax rules were announced in April, 2024, a number of individuals rushed sales of small businesses and real estate to avoid the higher capital-gains taxes that would come into effect by the June deadline. Families expedited title transfers on properties for estate planning possibly at a time that was not ideal. If the new capital-gains tax proposals end up being dropped, there is no doubt these groups of individuals will be extremely upset.
One might argue that the government should not be held responsible for any losses from those sales and transfers, given that they predate the current uncertainty. But what about the time, effort and resources taxpayers expend this season on complying with the new rules, which could potentially be all for naught? That’s not to mention the cost of having any additional taxes paid tied up for however long they take to be refunded from the CRA. And let’s not forget the turmoil that followed when the government introduced and then backtracked on new reporting requirements for bare trusts.
As we head into tax season, those with capital gains north of $250,000 will certainly be making the valid argument that we should be following the original tax regime, which to this point the CRA has advised against. It would be reasonable to request that we hold off on the tax filing until we get more clarity on the new rules, rather than paying higher taxes that may or may not apply.
To temper the backlash from the new capital-gains proposal, the federal government also announced the New Canadian Entrepreneurs’ Incentive, which calls for a 33.3-per-cent inclusion rate for a one-time capital-gains exemption of up to $2-million for individuals selling active businesses. This limit was set to increase by $200,000 each year until it reaches $3.25-million in 2034, incentivizing some business owners to wait for the limit to increase year over year before selling their business. Again, this proposal has not passed into law, making it very difficult for business owners to decide on the timing of selling.
While the federal government may have the luxury to wait for three months, most Canadians don’t. What’s worse is that the uncertainty around the new rules could influence investors to put their money elsewhere, in countries with greater stability. Until the smoke clears, Canada is losing out.
I fear the collateral damage to an economy already in trouble that will come from this decision. Canada’s real GDP per capita has declined for six consecutive quarters as of the third quarter of 2024. By this yardstick, Canada has been in a deep recession for some time and there is an urgency to get this country back on track.