How to handle uncertainty about capital gains in tax filing this year

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Monday’s announcement by Prime Minister Justin Trudeau that he will be resigning, along with the prorogation of Parliament, means that all government bills and other parliamentary legislative matters that were in progress effectively die on the order paper. For taxpayers, this means a bunch of tax legislation that was announced, but never formally enacted, is dead – at least for now, if not permanently.

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Among the tax changes left in limbo of most interest to individual taxpayers are the proposed changes to the capital gains tax, and the recent donation deadline extension. Here are some thoughts on a practical approach to each of these unresolved proposed changes.

Capital gains changes

The 2024 federal budget proposed an increase to the capital gains inclusion rate for gains realized on or after June 25, 2024, whereby the inclusion rate was increased to 66.67 per cent, up from 50 per cent. Individuals and certain trusts (specifically, graduated rate estates and qualified disability trusts) would still be entitled to the former 50 per cent inclusion rate on the first $250,000 of capital gains annually. The increase in the top tax rate on capital gains over $250,000 is about nine percentage points, depending on your province or territory of residence.

The April 16, 2024, budget announcement was followed up by a motion tabled in Parliament on June 10, 2024. On Sept. 23, 2024, the government tabled a Notice of Ways and Means Motion (NWMM) to introduce a bill entitled An Act to amend the Income Tax Act and the Income Tax Regulations.

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With the prorogation of Parliament, this NWMM is dead, meaning that there is a likelihood that the capital gains tax changes will not get passed anytime soon, if ever. Which leads to a very practical dilemma since millions of taxpayers, whether they be individuals, corporations or trusts, are getting ready to file their 2024 tax returns, some of which will contain post-June 24 dispositions. What should we do? Do we take the position that the proposed changes are dead, and thus simply apply a 50 per cent inclusion rate to all capital gains in 2024? Or, should we assume that the capital gains tax will ultimately be introduced as a bill and passed into law, someway, somehow, someday, by the current or a future government, and simply use the higher 66.67 per cent inclusion rate, as applicable?

On Tuesday, the Department of Finance issued some guidance to taxpayers on its approach. In an email, a spokesperson said that, 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 NWMM tabled Sept. 23, 2024. According to Finance, “Parliamentary convention dictates that taxation proposals are effective as soon as the government tables a (NWMM); this approach provides consistency and fairness in the treatment of all taxpayers.”

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To this end, the CRA will be issuing the forms needed to allow taxpayers to file in accordance with the new capital gains rules by Jan. 31, 2025. Arrears interest and penalty relief, if applicable, will be provided for those corporations and trusts impacted by these changes that have a filing due date on or before March 3, 2025.

Finance also confirmed that even if Parliament is prorogued, or ultimately dissolved, the CRA will “generally continue to administer proposed legislation consistent with its established guidelines.” That being said, when Parliament does resume, if no bill is introduced and passed in the House of Commons, and the government signals its intent to not proceed with the proposed capital gains tax, the CRA would cease to administer it.

So, if you want to be safe, and not risk being charged non-deductible arrears interest, compounded daily, at the prescribed rate (currently 8 per cent), then my advice is to pay your capital gains tax at the higher inclusion rate, as applicable. If it turns out that the capital gains tax increase doesn’t get passed, you’ll be entitled to a tax refund, along with refund interest (currently at 6 per cent), starting May 30, 2025, assuming you file your 2024 personal return on time.

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For taxpayers who sincerely believe that this legislation won’t see the light of day, you certainly have the legal right to follow the existing legislation, and report all your 2024 capital gains with a 50 per cent inclusion rate. The CRA won’t come after you for the additional tax owing, nor pursue collection efforts, until, and only if, the draft legislation eventually becomes law, and is effective for 2024.

If you’re unsure what to do, and your capital gains post-June 24th are significant, reach out to your tax advisor for more specific, tailored advice.

Donation deadline

The other widely-communicated tax change that is currently in limbo is the Dec. 30, 2024, federal government announcement that it intends to amend the Income Tax Act to extend the charitable donation deadline until February 28, 2025, for making donations eligible for tax support in the 2024 tax year. The government explained that the extension is meant to “mitigate the impacts of the four-week Canada Post mail stoppage,” since many charities rely on mass mailing campaigns each December, and donor response to those solicitations may have been significantly affected due to the postal strike.

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In its press release, the government said that it will introduce legislation effecting these changes once Parliament returns in the new year. In the past few days, I’ve received numerous inquiries from clients, advisors, and even a couple of charities, as to the status of this tax change, given the prorogation of Parliament.

As I wrote last week, I think this tax change will survive, as I can’t envisage a scenario in which any new government that is formed doesn’t fully support this charitable provision, retroactively. And, from a practical point of view, the CRA and the department of finance jointly announced this measure in a press release. Since it’s the CRA that will be assessing your 2024 tax return this spring, I think it’s a safe bet to include donations made this January and February on that return, if you wish to do so (versus saving them until 2025, which is still an option).

Retroactive legislation to effect this change will likely come later in 2025.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com.

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