Capital Gains Inclusion Rate Increase Might Not Happen

The possibility that the proposed increase in the capital gains inclusion rate, as well as the increase in the lifetime capital gains exemption to $1.25M, may not happen has created a complicated filing environment for taxpayers. If an election is called before the capital gains proposals are passed, or if parliament is prorogued, the proposals will go up in smoke, which would be lovely but for the uncertainty that it creates in the interim. We believe that it is highly unlikely that a new government would move forward with these proposals, particularly if the new government is a Conservative one.

How should I report my post-June 24 capital gains?

Many Canadians have, rightly, planned their affairs as if the proposals would become law, which is normal and prudent. Interestingly, as filing season for many post-June 24 yearends settles in and we have to start filing returns, potentially under the new rules, the Canada Revenue Agency (CRA) currently has no legal ability to assess tax returns based on the proposed capital gains legislation, yet. On September 23, 2024 the government tabled a modified Notice of Ways and Means Motion (NWMM) to introduce proposed legislation, which the CRA has recently (as at November 14, 2024) indicated it will begin administering.

The related tax forms and tax preparation software has not been released or even approved, however as of November 14, 2024 the CRA have indicated that such forms will be available on January 31, 2025. The CRA have realized that this puts certain taxpayers in an awkward position with regards to late filing their returns, more on this below. Notwithstanding this, the CRA has provided guidance via CPA Canada, encouraging taxpayers to file returns based on the proposed legislation.

Can my accountant even file a return under the proposed rules?

Preparers can file returns based on the announcements, however they currently have to override certain fields in their software, based on their manual calculations of how they interpret the new draft laws and government announcement documentation.

That said, the CRA have recently (as of November 14, 2024) indicated that they will be providing updated tax forms on January 31, 2025 so tax payers can report their income in accordance with the announced measures. 

Will penalties and interest be waived?

When the updated tax forms are released on January 31, 2025, some taxpayers will have already missed their deadline to file. If a taxpayer’s yearend falls between June 25 and August 30, 2024, their filing deadline is before the January 31, 2025 release date of the new forms.

Accordingly, the CRA have recently indicated that relief from penalties and interest relating to the proposed rules will be granted for taxpayers who have a filing deadline on or before March 2, 2025. The CRA indicates that more details on this announcement are pending as of November 14, 2024. 

The CRA indicates that the interest relief will also expire on March 2, 2025, which means that impacted taxpayers will have 1-month (January 31 – March 2) to file their taxes. We believe this is an unrealistic window considering how long it takes to work through a normal yearend and  considering that tax preparers are already flat out with regular deadlines during that time. Why not grant a few months of relief? 

It is unclear if the relief will be automatically applied, or if taxpayer will have to file a RC4288 Request for Taxpayer Relief (an undertaking which most tax preparers charge for). Further, it is unclear if the CRA will extend such relief to all taxes payable, or just the taxes relating to the capital gains in question. As of November 14, 2024 there is no indication if this relief will extend to certain election forms that are directly impacted by the proposed legislation.

This presumably leaves room for the taxpayer to file under the new OR old rules without the risk of penalties or interest applying when an amendment is submitted or the CRA re-assesses the return, resulting in any additional tax payable. The details are required to make this determination for sure.

Should we object to our own filings?

Presuming we are able to electronically file the returns, it seems prudent for taxpayers and tax preparers to file a Notice of Objection immediately when they receive the related Notices of Assessment. At Achen Henderson, we’ve never objected to a return that was assessed as we filed it, however this seems like what we now have to do in order to preserve the taxpayer’s rights to change the return on the basis of whatever legislation ends up sticking. What a mess!

What if the proposals do not become law?

Taxpayers who follow the CRA recommendations and proactively file and pay tax based on the proposed legislation would need to file an amended return to adjust for the correct amount of taxable capital gains and request a refund for the overpaid tax, my suggestion is not only to file an adjustment, but to file a notice of objection to the Assessment immediately upon receipt, as suggested above.

Normally, after the adjustment is accepted, the CRA would pay interest on such overpayments, but at a lower rate (currently 5% for corporations) than the current nine per cent for liabilities (currently 9%) if the taxpayer opted to pay the lower amount of tax. This is subject to the CRA’s recent announcement that it would waive penalties and interest as noted above, the details of which are still pending. 

I thought this was a done deal?

Most of the people who I speak with do not know that there is currently no bill before Parliament and the chances of this announcement disappearing due to an early election are real. The Liberal’s political risk at this highly contentious time in parliament could make it difficult for them to table this legislation and receive support for it. This means that the current 50 per cent capital gains inclusion rate, and the $1.016M lifetime capital gains exemption limit may remain in effect.

Why are the CRA doing this to us?

They aren’t. The CRA are simply the enforcers of the law and so they have it just as hard as we do right now as they do not have clear direction from the government on how to proceed on the proposed changes. This is a very common problem for the CRA under Justin Trudeau’s current government with a variety of things like the UHT, Bare Trust Reporting and various other legislative fiascos caused by this government.

In short, the CRA are responsible for administering the law, and not for administering “announcements”. Because the government announced an ‘in force date’ of June 25, 2024, the CRA have recently announced that that they will administer the tax rules as proposed in the Sept 23 NWMM for the 2024 tax year. 

How is this fair?

It isn’t. In our view, this isn’t how a modern democracy should be introducing major tax law changes. A lot of taxpayer’s planning strategies have hinged on the successful implementation of the proposed legislation. If the legislation fails, the taxpayer will face different tax liabilities than what they had originally planned for, just a few short months ago. The current tax environment involving capital gains is certainly confusing, and there is currently no clear path forward.

Canadians should continue to pay attention to this evolving story and be prepared to thank their accountants for attempting to make sense of that which little sense can be made.

Wondering how the proposed capital gains inclusion rate changes impact you?

Read about the January 31, 2025 update here.