On January 6, 2025, Prime Minister Justin Trudeau announced his resignation and requested Parliament's prorogation until March 24, 2025—a move that has left many taxpayers concerned about the future of key tax legislation, particularly the proposed increase to the capital gains inclusion rate.
Background: Capital Gains Legislation and CRA’s Role
On September 23, 2024, the government tabled a Notice of Ways and Means Motion (NWMM) proposing a capital gains inclusion rate increase. This increase, which impacts gains realized after June 24, 2024, raises the inclusion rate from one-half to two-thirds for corporations, most trusts, and individuals with annual capital gains exceeding $250,000.
Conventionally, the Canada Revenue Agency (CRA) implements tax changes as soon as an NWMM is tabled, even before the legislation becomes law. This practice aims to simplify compliance and prevent tax planning loopholes, though it has no statutory basis.
Prorogation’s Impact and CRA’s Position
When Parliament is prorogued, pending bills "die" and must be reintroduced in a new session. Despite this, the CRA confirmed it will continue enforcing the proposed inclusion rate as if it is already in effect. Updated tax forms reflecting this change are expected by January 31, 2025, and the CRA has promised interest and penalty relief for corporations and trusts with filing deadlines before March 3, 2025.
Key Scenarios for Taxpayers
With Parliament set to resume on March 24, 2025, several potential political outcomes could influence the future of the capital gains inclusion rate:
Non-Confidence Vote and Election: A new Liberal leader could face a vote of non-confidence, triggering an election. If the Conservatives win—currently ahead in polls—they are unlikely to reintroduce the inclusion rate increase.
Reintroduction and Passage: If the Liberals remain in power, they may reintroduce the legislation and pass the inclusion rate increase, reinforcing the CRA’s current approach.
Continued Liberal Leadership: If the opposition refrains from supporting a non-confidence motion, the Liberals may continue governing and present a spring budget that includes the capital gains changes.
What Should Taxpayers Do?
Taxpayers must decide how to file their 2024 returns in the face of legislative uncertainty:
File Using the Higher Inclusion Rate: This approach aligns with CRA’s guidance but risks overpayment if the proposal is not enacted. In this case, taxpayers may need to file amended returns to secure refunds.
File Under Existing Law: Taxpayers may file using the current one-half inclusion rate. If the increase is approved later, they will owe the difference plus interest. However, CRA guidelines indicate that taxpayers cannot be compelled to file based on proposed changes that are not yet law.
Broader Implications and Related Measures
This uncertainty extends beyond capital gains. Business-friendly provisions, such as the proposed increase to the lifetime capital gains exemption (to $1.25 million from $1,016,836 in 2024) and the Canadian Entrepreneurs’ Incentive (CEI), are also at risk. These measures could be scrapped depending on the political landscape.
A Frustrating Legacy
This situation echoes prior tax policy reversals under the Trudeau government, such as the delays in bare trust reporting and the Underused Housing Tax. These eleventh-hour policy shifts have left many taxpayers—particularly middle-class Canadians and business owners—frustrated after making good-faith planning decisions only to face regulatory uncertainty.
Final Thoughts
With the capital gains inclusion rate still in flux, taxpayers face difficult choices ahead of the April 30, 2025, filing deadline. As more updates are expected in the coming weeks, Canadians can only hope for policies that support long-term growth and stability rather than contributing to financial uncertainty.
About
Nex CPA is a boutique Canadian digital accounting firm that provides online accounting solutions by combining technology and forward-thinking businesses. Tailored for the modern entrepreneur, we provide an easy, automated and client-focused service so you can focus on working 'on' the business and not 'in' the business.
For more information, please contact us at info@nex.cpa.
Comments