The capital gains mess may be over, but the effects linger on

Article content

The Department of Finance has deferred the capital gains proposals to Jan. 1, 2026, and the Canada Revenue Agency says it will stop administering the proposals for 2024 and 2025 filings, but there are many technical questions about these announcements for tax specialists.

Article content

Article content

For the average Canadian, however, let me interpret these announcements for you in plain English: the vast majority of the capital gains proposals are dead. They have a snowball’s chance in hell of ever being implemented despite the government’s “deferral.”

Article content

The government is punting this toxic issue to the next government since it is very likely that an election will be called before the proposed implementation date. If the Liberal Party gets re-elected, it could decide to move forward with the proposals, but it could also decide to drop them like a hot potato.

If the Conservatives are elected, the proposals are dead given the emphatic announcement by Conservative Leader Pierre Poilievre that he would “reverse” such proposals should he become prime minister.

There are a number of reasons why the capital gains proposals were toxic. For one, the Prime Minister’s Office decided to go back to the lame political well of “asking the rich to pay a little bit more” and falsely said the proposals would only apply to 0.13 per cent of Canadians. It also defended the proposals by stating they were necessary to provide “intergenerational fairness.”

Then there was a cringeworthy video by Justin Trudeau that invented a new marketing phrase, the “capital gains advantage,” which inappropriately compared a nurse’s salary to an investment banker realizing capital gains.

Article content

Article content

It was topped off by a bizarre speech by then finance minister Chrystia Freeland, who said : “Do you want to live in a country where those at the very top live lives of luxury, but must do so in gated communities behind ever higher fences, using private health care and airplanes because the public sphere is so degraded and the wrath of the vast majority of their less privileged compatriots burns so hot?”

Interestingly, Freeland, one of the Liberal Party’s leadership candidates, has said she will not move forward with the proposals if she becomes leader.

In other words, the politics of these proposals were ugly, misleading and false. Overall, Canadians weren’t buying the ugly politics and were aware that these misguided proposals were a simple, wide-sweeping and complex tax grab to support out-of-control spending.

But it gets worse. Canadians were encouraged to crystallize their holdings prior to the planned implementation date of June 25, 2024. Letting the tax tail wag the investment dog is never a good idea, but the government was essentially encouraging it to add one-time taxation revenues. Now, with the benefit of hindsight, many such dispositions were obviously not necessary.

Article content

Many in the tax community were left scrambling. This included hard-working bureaucrats at the tax legislation division who had to develop draft legislation in a timely fashion. The CRA was also left in a quandary about how to administer the proposals and develop new forms. Tax software developers were also given a mess to deal with.

But, most importantly, taxpayers and their advisers were left in a constant state of uncertainty. Should they accelerate dispositions despite not knowing exactly what the legislation looked like? Advisers could not adequately and technically address taxpayer/client questions. Filing corporate tax returns for affected corporations was a mess. Given that the proposals were not passed, how should they report capital gains?

Advisers have seen this movie recently — twice — with the debacle of the Underused Housing Tax filing season and the “bare trust” debacle last year. This tax filing season was shaping up to be another disaster.

Given the above, the decision by the government to back down is the right decision, but it is not to be celebrated. There was a lot of damage caused by the ugly politics and the long-lingering uncertainty.

Article content

Many in the tax community, including me, had called for the government to suspend or defer the proposals until the uncertainty could be dealt with months ago. Such cries fell on deaf ears until the fury became so intense the government was essentially forced into making a decision.

The damage caused includes a growing and significant distrust of our tax system, both in the way tax policy is proposed and how it is administered.

As a reminder, our tax system is a self-reporting system, and has a high potential to break down when there is a massive distrust about the overall system. The capital gains proposals are a textbook example of how Canada should not introduce taxation policy. There is a much better way and our country’s history has good pockets of those examples. Tax reform, as promised by the Conservative Party, is a spark of hope to return to those better examples.

In the meantime, the tax community needs to acknowledge those people who worked hard to deal with the capital gains proposals, including affected taxpayers, advisers, the bureaucrats at the Department of Finance and the CRA (which were trying hard to release instructive information) and software providers. We can only hope that better times are ahead and our tax system can materially improve.

Article content

As the famous American economist Thomas Sowell implied in his writings, governments end up governing by crisis, not by principle when they introduce tax policies without thinking them through. And to paraphrase former United Kingdom prime minister Margaret Thatcher, a tax policy that changes with the political winds is not policy; it is politics.

Canada needs to learn from such wisdom. We don’t need another tax crisis, nor tax policies that change with the winds. A significant rethink of how taxation policy is introduced and administered in Canada is very much in order.

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. 

_____________________________________________________________

If you like this story, sign up for the FP Investor Newsletter.

_____________________________________________________________

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here.

Article content