The CRA said it would provide arrears interest and penalty relief to corporations and trusts that had to file a return by March 3, 2025 without access to updated CRA forms reflecting the new capital gains inclusion rate.BLAIR GABLE/Reuters
Incorporated clients and small businesses facing imminent tax-filing deadlines remain in the dark on how to file their tax returns or calculate their taxes owed as the federal government’s proposed hike to the capital gains inclusion rate remains in legislative limbo.
Earlier this month, the Canada Revenue Agency (CRA) updated its guidance to say that it intends to administer the proposed 66.7 per cent inclusion rate effective retroactively to June 25, 2024, even though the proposed changes haven’t received parliamentary approval. The CRA said this is consistent with its standard practice.
The CRA also said it would provide arrears interest and penalty relief to corporations and trusts that had to file a return on or before March 3, 2025, without the benefit of having access to updated CRA forms reflecting the new inclusion rate. The CRA said it expected to publish updated forms by the end of January, 2025.
Tax advisors welcomed the CRA’s announcement, saying it provides relief to corporations that choose to file based on the current forms and/or pay taxes at the 50 per cent inclusion rate for gains realized on June 25 and after.
Corporations and most trusts are subject to the higher inclusion rate on all capital gains realized June 25 and after under the proposed legislation, not just on gains above an annual $250,000 exemption amount available to individuals and some trusts.
However, advisors say they’re waiting for additional guidance from the CRA, which the agency said it would provide in the coming weeks.
“While it’s good news the CRA has done this, there are potentially other shoes to drop,” says Brian Ernewein, senior advisor, national tax, at KPMG LLP in Ottawa.
For example, when the CRA forms are ready, Mr. Ernewein says, “Will they say explicitly, ‘Now you must file on the basis of the proposed legislation” if it hasn’t yet been enacted?
“I suspect they won’t, simply because they don’t have the authority to tell taxpayers to do that without the legislation,” he says.
The federal government tabled a notice of ways and means motion to implement the change to the capital gains inclusion rate on Sept. 23. It has remained stuck as the House of Commons has debated a matter of privilege.
Corporations must file a return within six months after their tax year ends. For example, a corporation with a June 30 year-end would have to file their return by Dec. 31. Corporations typically pay taxes in regular instalments with any residual taxes owed either two or three months after their year-end, depending on the type of corporation.
The CRA’s interest and penalty relief, effective only to March 3, 2025, appears to cover corporations and trusts with a year-end between June 25 and Sept. 3, 2024.
However, it remained unclear from the CRA’s guidance what type of interest and penalty relief it was providing.
For example, the CRA did not provide a direct response to a question from the Globe and Mail as to whether the interest relief it was offering was for the difference between taxes paid when calculated at a 50 per cent capital gains inclusion rate and a 66.7 per cent rate, or whether the relief extended to the non-payment of taxes up until March 3, 2025. The CRA also did not provide information as to which penalties it would relieve.
Tax advisors say they believe the CRA’s temporary interest relief would be limited to the difference in taxes between filing and paying at the lower inclusion rate as opposed to the higher rate, and that the penalty relief would be directed toward the non-payment of taxes owed.
“My take on it is that as long as you filed your return on a timely basis, then the penalties in question that they’re turning off are penalties for tax deficiencies,” Mr. Ernewein says.
Emily Mantle, a chartered professional accountant with Compass CPA in Sudbury, Ont., says she intends to consult with affected clients as to whether they want to file and pay taxes using the 50-per-cent inclusion rate; manually adjust the existing forms and pay taxes using the 66.7-per-cent rate; or file using the current forms but calculate and pay taxes based on the higher rate.
Given the CRA’s relief announcement, Ms. Mantle says she’s leaning toward advising clients to file and pay their taxes using the existing forms “and then making an assessment later on to pay the additional taxes.”
Ryan Minor, director of tax with CPA Canada in Sudbury, says the interest and penalty relief announcement “incentivizes people just to defer” paying the additional taxes – if only to not prepay taxes unnecessarily.
The CRA did not respond to questions from the Globe directly as to when and how it would assess for additional taxes owed, if the proposed legislation becomes law, or when and how the agency would refund excess taxes paid if the legislation is not enacted.
The CRA also didn’t provide a reason for choosing the March 3, 2025 relief deadline, which doesn’t appear to coincide with a set filing deadline for corporations, trusts or individuals.
Ms. Mantle speculates the agency chose the date to provide taxpayers who file using the existing forms about a month to recalculate their tax owing using the updated CRA forms while still benefiting from interest relief.
Mr. Ernewein says if the legislation isn’t passed promptly, the CRA will run into further issues administering the proposed higher inclusion rate when returns for most trusts become due on March 31, 2025, and when tax returns for individuals are due on April 30, 2025.
“It’s a muddle,” Mr. Ernewein says.
Ms. Mantle agrees, noting that, “To the extent that that legislation has not received royal assent, not only does it put accountants in a precarious position, it also puts the CRA in one, too.”