CRA messing up when it comes to capital gains tax rules

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The capital gains inclusion rate proposals first introduced in the April 16, 2024, federal budget are on life support because of the political chaos that Canada is currently experiencing.

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The upcoming resignation of Prime Minister Justin Trudeau, accompanied by the prorogation of Parliament, further confirms this. All government bills and other items of business in progress effectively die on the order paper when Parliament is prorogued.

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A new session of Parliament can reintroduce the bills at the stage they were at with the unanimous consent of Parliament, but the capital gains proposals never made it past the notice of ways and means motions stage, so they would have to be reintroduced in full. Given the uncertainty, it’s highly likely the capital gains proposals will never be passed.

But the Canada Revenue Agency (CRA) recently said it would continue to apply the proposed increases even if an election is called. I disagree with that decision.

Numerous other people have been commenting on this issue, including other articles, social media posts and podcasts saying that the “rule of law” is not being respected by the CRA, Prime Minister Justin Trudeau is forcing this collection of tax dollars because his government needs the money and other nonsense. This is simply wrong and the stuff of conspiracy theories.

I am no fan of this current government because of its poor tax and economic policies, but the CRA’s administrative policies on this issue have little, if anything, to do with politics.

Why? Well, it is very common in Canadian tax law for new proposals to have immediate effect upon announcement (or some future date as announced). There are very good reasons for this, such as trying to ensure the perceived “mischief” that the tax proposal is aiming at takes immediate effect. Or a new policy — such as the capital gains inclusion rate increase — takes effect as of a certain date. Becoming law, however, takes time. It can often take months or, in some cases, years to receive royal assent.

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The CRA has a decades-old administrative policy to ask taxpayers to file on the basis of proposed legislation. This practice is intended to ease the compliance and administrative burdens on taxpayers and the agency. However, the CRA generally waits until the measure has been enacted before reassessing taxpayers if the proposed legislation results in an increase in benefits or if a significant rebate or refund is at stake.

There is nothing controversial about this long-standing practice of the CRA. It is proper and grounded in parliamentary convention. And for those wondering, yes, retroactive tax legislation is also proper and legal, and has a long-standing history, tradition and judicial support.

I guess one could quibble that the CRA won’t enforce beneficial amendments that result in rebates or refunds, but it will enforce proposed tax legislation that requires additional tax. But even with that, the CRA’s Audit Manual that instructs its auditors on how to deal with proposed legislation states the following in chapter 12, paragraph 3.5:

“If the proposed legislation is not beneficial to a taxpayer, the CRA cannot require them to file on the basis of proposed legislation. In such cases, inform the taxpayer that they are responsible to apply the legislation according to the enacted legislation after royal assent, and that they may be subject to interest on amounts owing.”

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Again, that is a reasonable approach.

With that in mind, why do I disagree with the current position of the CRA regarding the capital gains proposals?

It’s simple: this long-standing policy of the CRA makes sense for most situations, but, like most things in life, a one-size-fits-all approach may not always be appropriate.

If an election is triggered, it is highly probable (obviously, nothing is guaranteed in elections) that a new governing party — the Conservatives — will take over. They are on record as saying they do not support the proposals.

Accordingly, if the proposals die because of an election call, it would be more appropriate for the CRA to “read the room” better to assess whether its blanket policy needs adjustment.

A better approach for the CRA on this matter would be to stop encouraging taxpayers to comply if an election is called regardless of the reasons why an election is triggered. Instead, repeating the warning in chapter 12 of the audit manual would be more broadly appropriate.

If the Liberals and/or NDP form the next governing party, then it would be appropriate for the CRA to restart encouraging compliance with the capital gains proposals. Given today’s circumstances, however, that is highly unlikely.

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To continue to apply a one-size-fits-all policy in these unusual circumstances will require subsequent adjustments and refunds to be issued if the proposals permanently die. This would fly in the face of the reasons for the CRA’s long-standing policy to ease overall burdens.

For tax professionals advising their clients, there is no risk-free advice. If you advise your clients to follow the CRA’s policy, they may end up having to amend their tax returns and seek refunds if the capital gains proposals permanently die. If you advise them to not follow the CRA’s recommendations, they could end up owing additional tax, interest and penalties if the proposals indeed move forward.

Having said that, it’s my opinion that professionals have a moral and ethical obligation to also “read the room” and advise their taxpayer clients accordingly.

An old Chinese proverb states, “A wise man adapts himself to circumstances, as water shapes itself to the vessel that contains it.”

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Lots of wisdom in that old proverb. The CRA’s policy for the capital gains proposal needs a more adaptive approach in the current circumstance. That would go a long way to eliminating the unfortunate and misleading rhetoric on this issue that we’re seeing.

Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com and his LinkedIn profile is https://www.linkedin.com/in/kimgcmoody. 

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