On January 6, 2025, Prime Minister Justin Trudeau announced his resignation as prime minister and the prorogation of Parliament until March 24, 2025. At the federal level, prorogation is an act by the Governor General, advised by the Prime Minister, that concludes a session of Parliament. This halts the legislative process, effectively nullifying legislative bills that have not received Royal Assent before prorogation, with some exceptions in rare cases. Such legislative bills typically need to be reintroduced in the next session of Parliament as though they had not been previously introduced in a prior legislative session.
One set of legislative proposals that was tabled on September 23, 2024, but did not receive Royal Assent is the proposed amendments to the Income Tax Act (Canada) (the “Tax Act”) aimed at increasing the capital gains inclusion rate from one-half to two-thirds, starting on June 25, 2024 (the “Capital Gains Proposals”). As such, the Capital Gains Proposals must be introduced as a new bill in a future Parliamentary session for them to become law. While there is a possibility that the Capital Gains Proposals may not be re-introduced after prorogation, taxpayers may not see an immediate reduction in their tax bill unless the federal government explicitly states its intention not to proceed with these proposals.
Firstly, the delay in enacting the Capital Gains Proposals (if enacted as currently proposed) would not affect their effective date should they eventually receive Royal Assent. Generally, legislation becomes effective upon receiving Royal Assent; however, legislation may have retroactive effect if there is a clear intention to do so.[1] Accordingly, if the legislature explicitly intends for a tax amendment to be effective prior to the date of Royal Assent, taxpayers are typically required to comply with the amended law from that specified effective date once Royal Assent has been achieved. Consequently, if the Capital Gains Proposals are enacted into law, they would remain effective as of the date explicitly set in the proposals themselves: June 25, 2024.
Secondly, the Canada Revenue Agency (“CRA”) has announced that “[n]otwithstanding that Parliament is prorogued, the [CRA] will continue to administer” the Capital Gains Proposals effective June 25, 2024.[2] This announcement is in line with the CRA’s longstanding practice of requesting taxpayers to file their taxes in light of proposed legislation unless the federal government signals that it does not intend to enact such proposals into law.[3] Historically, one of the primary reasons for this position has been to reduce the burden associated with both complying with and enforcing retroactive legislative amendments, such as the Capital Gains Proposals.[4] The CRA has also reasoned that the practice of filing tax returns in accordance with proposed legislation aligns with Parliamentary convention, wherein tax proposals take effect immediately upon the Minister of Finance presenting a Notice of Ways and Means Motion.[5]
Additionally, notwithstanding its administrative practice, the CRA has noted that where proposed legislation is contrary to taxpayers’ interests, it cannot require taxpayers to file in light of such proposed legislation, [6] as legislation becomes binding only upon receiving Royal Assent. There are, however, consequences for failing to file in accordance with proposed legislation. One significant consequence is the application of interest. If taxpayers fail to file their taxes in accordance with proposed legislation, they are required to retroactively comply with the legislation once it receives Royal Assent, and may be obligated to pay interest (and possibly penalties) on any outstanding amounts.[7] Conversely, should the federal government announce a decision not to enact the Capital Gains Proposals, taxpayers who have filed according to the proposed amendments to the Tax Act may need to take action to order their affairs[8] to obtain a refund from the CRA, since it is unlikely that it has the capacity to do so unilaterally.
Many commentators have questioned whether the CRA’s standard practice of administering tax proposals prior to enactment is appropriate given the specific facts at hand. While CRA’s approach is reasonable in typical scenarios involving the administration of proposed tax legislation, many argue that the current state of affairs is hardly “typical”. There is a reasonable likelihood that the current government will fall shortly after Parliament resumes sitting, with an election to follow a month or two later. If the current polls are to be believed, the Conservatives are the party most likely to form a government after the election and they are on record as opposing the Capital Gain Proposals. In the context of a Liberal Party leadership race, it is also plausible that one or more of the candidates may choose to chart a different course than the current government on this issue – particularly given the current economic environment. After all, it was a previous Liberal government that reduced the capital gains inclusion rate on two separate occasions in 2000. All of this is to say that the prospects of the Capital Gains Proposals actually being enacted appear to be considerably lower than that for typical proposed legislation and it seems reasonable for the CRA and/or the Department of Finance to consider this reality.
In the meantime, taxpayers are running out of time as their tax filing deadlines approach. We may not know until prorogation ends in March whether the Capital Gains Proposals will be re-tabled in the next Parliamentary session, just days before many of the Tax Act’s information reporting deadlines fall due, and only a few weeks prior to many taxpayers’ April 30 filing deadline. Furthermore, there is additional complexity for those who entered into transactions to crystallize their capital gains prior to June 25, 2024, as they may need to consider the risks and benefits of filing tax elections to “undo” the tax effects of such transactions, among other tax considerations.
Given the uncertainty surrounding the implementation of the Capital Gains Proposals as law, it is advisable for taxpayers to continue monitoring the situation closely.
[1] Gustavson Drilling (1964) Ltd v Canada (Minister of National Revenue), [1977] 1 SCR 271, [1977] 1 RCS 271.
[2] CRA, “T2SCH6 Summary of Dispositions of Capital Property”, T2SCH6 Summary of Dispositions of Capital Property - Canada.ca. See also CRA, “Businesses: Here are the top changes that will affect business taxes in 2025” (January 8, 2025), Businesses: Here are the top changes that will affect business taxes in 2025 - Canada.ca.
[3] See, for example, the CRA’s response to Question 11 submitted by Tax Executives Institute, Inc. on December 4, 2007, where the CRA noted that “Where Parliament is prorogued before draft legislation is passed, the CRA will generally continue to administer the legislation until such time it is advised that the government will no longer proceed with the proposed amendments.”
[4] Andrew W. Dunn, Ron Durand, Phil Jolie, and Mark Symes, "Canada Revenue Agency Round Table," Report of Proceedings of Sixty-First Tax Conference, 2009 Conference Report (Toronto: Canadian Tax Foundation, 2010), 3:1-29, CRA’s response to question 16 [CRA Roundtable].
[5] See for example the CRA’s response to Question 1 (Post Wind-up Obligations) at the 2011 STEP Conference, Views Document 2011-0401821C6 (June 3, 2011).
[6] CRA Income Tax Audit Manual (September 2020) at section 12.3.5.
[7] Ibid.
[8] CRA Roundtable, supra note 3, question 16.
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