Canada Revenue Agency national headquarters in Ottawa, on April 19, 2023.BLAIR GABLE/Reuters
A surreal thriller with an undead monster is keeping scores of Canadian households and businesses on the edges of their seats this winter. It isn’t a cinematic release. It’s the real-life saga surrounding the fate of the proposed capital-gains tax increase, which has become a zombie tax reform.
It is high time for the Trudeau government to kill that monster. If it won’t, the Canada Revenue Agency could at least neutralize it by publicly stating it will not collect interest or other penalties.
The Liberal government announced in its last federal budget it would raise the share of capital gains subject to income tax to 66.67 per cent from 50 per cent. The change generally means higher taxes on the profits from the sale of assets such as stocks or real estate, though the higher rate only applies to annual gains above $250,000 for individuals and there are some boutique exemptions for businesses.
The government said the measure would take effect on June 25, 2024, but it failed to pass supporting legislation before Parliament was prorogued on Jan. 6.
Yet, instead of dying on the order paper that day, the capital-gains tax hike entered the world of the undead. The CRA is continuing to uphold the higher inclusion rate, consistent with its long-held practice of following proposed legislation.
This leaves taxpayers facing two bad options. If they file at the old rate, based on current law, they risk incurring interest on any unpaid tax balance if the reform does eventually pass when Parliament resumes or under a new government. If they file using the higher rate, they risk overpaying taxes and having to seek a refund if the measure never becomes law.
The eventual demise of the tax hike has become more likely in recent days. Conservative Leader Pierre Poilievre said he won’t pursue the changes if he becomes the country’s next prime minister. Former finance minister and Liberal leadership contender Chrystia Freeland, who defended the policy before her December departure from cabinet, has now indicated she would ditch it. Two other candidates in the Liberal race, former central banker Mark Carney and government House leader Karina Gould, have also raised questions about the measure.
The CRA’s stance looks increasingly untenable. The long-standing practice of enforcing tax rules that aren’t yet law makes sense in most instances. Taxpayers who ignore upcoming changes when filing taxes risk being reassessed, which means extra work for both them and the government and carries the risk they’ll have to pay penalties and interest. But in the current unusual predicament, sticking to standard practice only creates more uncertainty.
Unsurprisingly, the CRA’s decision has attracted the public’s ire, along with at least two legal challenges. Yet, it would be awkward for the CRA, which must remain an impartial administrator, to depart from convention based on the likely agenda of whoever becomes the next prime minister.
The Trudeau government squarely bears responsibility for the current chaos.
It was the Liberals who split the tax hike from an omnibus budget bill they introduced in late April in a political attempt to force Mr. Poilievre to vote against the measure. Similarly, it’s the current government who is ultimately to blame for the Conservative filibuster that paralyzed Parliament in the fall – making it impossible to pass legislation – after the Liberals refused to comply with an order of the House in June to produce certain unredacted documents.
Finally, it was Mr. Trudeau who maneuvered to prorogue Parliament – before his government had passed enabling legislation – to give his party a chance to choose a new leader before a federal election.
The CRA, however, isn’t a helpless bystander. It should waive arrears interest for taxpayers who decide to file based on the 50-per-cent inclusion rate and confirm it won’t apply penalties. It recently provided similar relief around the bare trust reporting rules and the Underused Housing Tax, two confusing Liberal tax changes that also caused considerable taxpayer angst.
Ottawa should also adopt clear limits on when it is acceptable to collect taxes based on proposed legislation. The United Kingdom, for example, does not allow it when Parliament is prorogued. But that is a debate best left for calmer times. Right now, Canadians need the suspense to end as tax season approaches.