Capital gains proposals might die, but we still have to abide them

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Were you entertained with all the political drama last week? It started with the resignation of Chrystia Freeland as finance minister just before the release of the fall economic statement, which revealed some grisly details of Canada’s fiscal position and the tax measures were uninspiring as well.

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The most common question I’ve received over the past week has been what will happen to the capital gains inclusion rate proposals if the government falls? I have previously said that I believe the proposals will eventually pass into law, but as each day passes, the possibility of the government falling appears more likely, especially since NDP leader Jagmeet Singh said he will support a non-confidence vote when Parliament next convenes.

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I’m hopeful that we’ll see an election by early spring. Canada needs positive change and solid leadership sooner rather than later.

If the government falls, the capital gains proposals will die. In tax law, it is very common for many technical tax changes to die when an election is called. But it is also very common for such tax technical changes to be reintroduced by the new government, even if the new government is being led by a different political party.

Why? Because such amendments are often technical clean-ups of the Income Tax Act and generally do not have broad-based application. In other words, most such amendments are not controversial. The capital gains proposals, however, do not fall into that category. They are broad-based and certainly controversial.

The Canada Revenue Agency (CRA) has a long-standing practice to administer tax laws based upon proposed measures. The tax community, including me, has long supported such a position given the non-controversial nature of most tax amendments.

Accordingly, the CRA has been administering the capital gains proposals as if they will become law. But the capital gains proposals are not simple technical amendments; they have broad and sweeping consequences for many Canadian taxpayers.

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“If Parliament is dissolved for an election before the higher inclusion rate has become law, the CRA will continue to administer the proposed legislation,” the CRA has said. “The exception would be if the government dissolved as a result of a vote on a motion of non-confidence directly related to the proposed measure. In such a case, the CRA would cease to administer the proposed measure. Once Parliament resumes, if no bill is passed in the House of Commons, and if the government signals its intent not to proceed with the measure, the CRA would stop administering it.”

The exception would be if the government dissolved as a result of a vote on a motion of non-confidence directly related to the proposed measure. In that case, the CRA would cease to administer the proposed measure. Once Parliament resumes, if no bill is passed in the House of Commons and if the new government signals its intent not to proceed with the measure, the CRA would stop administering it.”

I don’t think that approach is in the best interest of Canadians. Yes, there is a chance that the proposals get passed into law, but it appears to be a small chance. The only path to getting the proposals into law would be if the business of Parliament can convene and get them passed. With the NDP’s statement, a possible prorogue of Parliament and the simple time it would take to even get a bill passed, it is highly unlikely such proposals see the light of day.

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Combine the above with Conservative Leader Pierre Poilievre being on record as saying his party does not support the proposals and this puts them on life support with very little brain activity.

Given that, I don’t agree with the CRA’s blanket policy to continue to administer the capital gains proposals even if an election is called. While anything can obviously happen with an election, it is highly unlikely the Liberal Party or the NDP forms the government after an election. That likelihood should be taken into consideration by the CRA.

While I appreciate the conservative nature and historical relevance of the CRA’s stance, it would seem that a reality check is in order. Perhaps a better approach would be for the CRA to simply caution taxpayers, after an election is called, that amendments to their prior filings may be necessary (in the unlikely event the capital gains proposals become law).

What should Canadians and their advisers do? Well, they would be wise to closely follow the politics and its related bouncy ball to see where it lands. There is a good chance we’ll be back to a broad-based 50 per cent capital gains inclusion rate and a lower capital gains deduction.

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In a democracy, policy is the offspring of politics. Therefore, watch its debate and discourse closely. As former United States Supreme Court justice Louis Brandeis once said, “The most important political office is that of the private citizen.”

Canadians, observe the politics of the next coming months very carefully. Your tax life depends on it.

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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