Canada To Enforce Capital Gains Change, Hides Pandemic-Sized Deficit

Hoping Canadian Parliament’s proroguing will provide relief from higher capital gains? Canada’s Department of Finance warns that isn’t the case, and new forms to pay the increased capital gains rate will arrive by month’s end. Parliament prorogued yesterday abandoning all unpassed legislation, that includes the changes to the capital gains inclusion rate. However, the tax authority begins to enforce new taxes once a notice is filed, and doesn’t change course until it’s directed to. That direction isn’t going to come easily, since that would require Finance to acknowledge a budget deficit just shy of the one reported in 2021, when the economy was shut down for a pandemic. 

Canada Plans To Raise The Capital Gains Rate, Targeting Windfalls

Capital gains are the profits made from the disposal of property, either through sale or deemed disposition. Sale of a business, stocks held for substantial periods, etc. are examples of the irregular income that would be considered a capital gain. Since it’s irregular, most countries only tax a share of the gain called an “inclusion rate,” since they aren’t trying to overly burden windfalls. 

In Canada, the inclusion rate is 50% of profits—so a $100 capital gain would be taxed like $50 of income when calculating taxes. As of last year, the Federal government has increased this to 66.7% for businesses and households with gains over $250k. This was sold as a tax on the 0.13% of households, but our analysis of the data used to make this claim revealed households are rarely hit with the tax twice, and 7x more households will be impacted than originally stated. A not-so-surprising finding for tax professionals, who know the tax is likely to impact retiring tradespeople and doctors rather than well-heeled families like the Bronfmanns and Westons the public was led to believe would be impacted. But no need to discuss that again!  

The Government of Canada (GoC) announced in June 2024 that the new inclusion rate would be retroactive for the year. Legislation was tabled but not passed, and became abandoned as of yesterday when Parliament was prorogued. Finance professionals were optimistic that the new capital gains rules were effectively dead, but that may not be the case, according to the Finance Department.  

Canada’s Finance Department Warns CRA Will Still Enforce New Capital Gains Rules

In an email, Canada’s Finance Department explained the new taxes are still in effect. The CRA begins enforcement of tax proposals once a Notice of Ways and Means Motion is filed, a document introduced to Parliament outlining how taxation will raise revenues. 

“In the event that Parliament is prorogued, or dissolved, the CRA will generally continue to administer proposed legislation consistent with its established guidelines,” explains Benoit Mayrand, a spokesperson for Canada’s Department of Finance. 

Adding, “Although these proposed changes are subject to parliamentary approval, consistent with standard practice, the Canada Revenue Agency (CRA) is administering the changes to the capital gains inclusion rate effective June 25, 2024, based on the proposals included in the Notice of Ways and Means Motion tabled September 23, 2024. Parliamentary convention dictates that taxation proposals are effective as soon as the government tables a Notice of Ways and Means Motion; this approach provides consistency and fairness in the treatment of all taxpayers.” 

The Department will release filing forms by January 31st. Arrears interest and penalty relief will also be applied. The enforcement will proceed unless the agency is directed to change course otherwise. It won’t be easy to change course, considering Parliament won’t be meeting until the end of March, leaving just days before the tax filing deadlines. 

“Upon resumption of Parliament, if no bill is passed in the House of Commons, and the government signals its intent to not proceed with the proposed measures, the CRA would cease to administer them,” says Mayrand. 

Despite Being Enforced, Changes Have To Be Reintroduced & Passed

Canada is ready to enforce the rules, but it’s unclear that they should be, considering the uncertainty. Parliament doesn’t prorogue after a Notice of Ways and Means is tabled but not resolved, but there is precedent. Back in 1986, Parliament resumed after being prorogued, and a Notice of Ways and Means regarding an excise tax was considered null and had to be re-tabled. 

Re-tabling and passing the changes are possible, but would be odd for a Government struggling with support. Repeating the actions that are proving to be incredibly unpopular would be an odd decision, though dumber ones are made regularly. It would also face difficulty finding support in a minority government where other parties have stated they plan to vote no confidence.  

Unfortunately none of this is likely to be resolved before the fast-approaching tax deadline. That means the CRA is still directed to enforce the issue, even if they expect amendments will be filed for all of the claims in a few months for rebates.

Canada Cancelling New Capital Gains Means Budget Deficit Nears 2021 Pandemic Gap In Spending

The Government of Canada (GoC) should be announcing a pause, but that’s unlikely due to its spending habits. The Fall Economic Statement (FES), only introduced days before the end of Fall, shows they expect Canadians to pay $17 billion more in taxes with the new capital gains inclusion rate. The FES also shows a budget deficit of $60 billion, about 50% higher than originally anticipated. If the capital gains inclusion remains at the previous level, the deficit soars to a whopping $78 billion—just 10% shy of the federal deficit in 2021. 

Is this economy doing fine or just 10% better than the pandemic economy where rolling lockdowns and physical restrictions from trade required higher spending? That discussion is more uncomfortable for policymakers than billing and rebating households for billions of dollars. It also may have implications on the quality of debt that Canada issues.