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Capital gains tax uncertainty – June 25th tax increase may not become law

Jan 17, 2025 | News

Tax Insights Published January 17, 2025 VOL 02 NO 01

ORIGINAL ARTICLE

By: Dorathy Yau – BCom, MTax
Vishal Raithatha – CPA, CA, MMPA, B.A.Sc. Computer & Electrical Engineering

Planning under consideration

On September 23, 2024, the government tabled a notice of Ways and Means motion proposing an increase in the capital gains inclusion rate from ½ to ⅔ for capital gains realized after June 24, 2024 (the potential impact of the original proposals was discussed in Tax Insights VOL 01 NO 01). While the bill has yet to receive Royal Assent, the situation has been complicated by recent political developments. Prime Minister Justin Trudeau’s resignation has led to a prorogation of Parliament until March 24, 2025. Additionally, the Department of Finance announced on January 7, 2025, that the Canada Revenue Agency (CRA) will proceed as if the proposed increase in the capital gains inclusion rate is in effect. These events have caused significant confusion and uncertainty for taxpayers regarding their income tax return filings and related tax payments, as well as with respect to navigating the effects of any pre-June 25th planning that may have been undertaken in anticipation of the proposed tax increase.

This release of Tax Insights assesses the current state of the capital gains tax regime and what this means for taxpayers from a planning perspective.

Analysis

When Parliament is prorogued, any bills that have not received Royal Assent are effectively cancelled. These bills would thus need to be reintroduced from the beginning or reinstated at the same stage in the legislative process. Given the upcoming Federal election, the likelihood of the bill receiving Royal Assent prior to upcoming tax return filing deadlines is low. The Conservative party also announced yesterday that they will not proceed with the proposed changes if elected and has called on the CRA to cease collecting the higher taxes.

With Parliament resuming on March 24, 2025, and the tax return deadline for most individual taxpayers being April 30, 2025, returns will likely need to be filed without certainty regarding the new capital gains rules. Corporate and trust taxpayers may face similar uncertainty based on their filing and tax payment deadlines. Consequently, taxpayers may have to decide on a filing position that could possibly result in an overpayment or underpayment of taxes owed depending on whether the new capital gains rules become law.

Taxpayers can file their 2024 income tax returns and pay capital gains tax based on the CRA’s announcement that they will administer the capital gains rules as if they are in effect (with a ½ inclusion rate for gains realized on or before June 24, 2024, and a ⅔ inclusion rate for gains realized after June 24, 2024). If the rules do not receive Royal Assent, this would result in an overpayment of taxes, and taxpayers will need to file amended tax returns or object to the notice of assessment issued by the CRA to receive a refund.

Alternatively, taxpayers could file their 2024 income tax returns and pay capital gains tax based on existing laws (at the ½ inclusion rate) since the proposed rules are not yet law. According to the CRA manual, the CRA cannot require taxpayers to file their returns based on proposed legislation that is not beneficial to them. If the rules receive Royal Assent, this approach will lead to an underpayment of taxes, requiring additional tax payments with interest and possibly, although in our view unlikely, penalties for unreported income. Notably, the current prescribed interest rate applicable to late taxes is high, at 8%, as compared to a few years back, and such interest is not tax-deductible.

Final remarks

The volatility of Canadian politics has undoubtedly created confusion for taxpayers, particularly regarding the capital gains legislation. Taxpayers should consult their tax advisors to help navigate these uncertainties and ensure that they make informed decisions in their tax filings and with respect to related tax payments.

In addition, tax planning undertaken in advance of June 25, 2024, in anticipation of an increase in the capital gains tax, should be revisited to assess how it may be optimized. This may entail, for example, delaying the filing of income tax elections until as late as possible or at least until there is clarity on the law.

The above content is for informational purposes only and is general in nature.  It is not intended to be advice.  No person or entity should act upon the information above without receiving professional advice after all the facts and circumstances specific to their situation are thoroughly reviewed.