Beware risks and rewards in adopting new capital gains rules

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The Canada Revenue Agency (CRA), supported by the Department of Finance, drew its line in the sand last week by saying its standard practice, which, to be fair, has been in place for decades and is supported by parliamentary convention, means it will continue to administer the capital gains proposals as if they were law.

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This is despite the high likelihood that the proposals will not get enacted anytime soon because of the current political chaos.

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Accordingly, the CRA will release its updated forms by the end of January. Commercial software providers will follow suit.

I sympathize with the CRA’s plight. It’s damned if it doesn’t proceed with its historical practice of administering proposed tax legislation (since, for example, it may be viewed as adhering to politics and its role is to be neutral) and it’s damned if it does proceed.

Notwithstanding, it’s been my position that in this very unusual time in history a one-size-fits-all approach is unlikely to be appropriate despite its historical practice and grounding in convention.

It is still a technical possibility that the capital gains proposals might eventually pass, but that possibility seems more remote with each passing day. With the Bloc Québécois and the NDP both giving the Liberal government a recent rebuff, it’s highly likely that Canadians will be going to the polls in the spring without the proposals being passed.

If so, this means Canadians and their advisers who blindly follow the CRA’s lead will be seeking amendments and refunds if the legislation does not get passed. Some have argued that a new government, likely the Conservatives, might resurrect the proposals after the election, but that possibility is about as good as a snowball’s chance in hell.

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As a result, the CRA’s efforts to update its applicable tax forms, technological systems and collection procedures for a tax amendment that is likely to be reversed seem like a complete waste of time and money.

Numerous tax preparers and taxpayers will, again, blindly follow the updated software for the capital gains proposals. If you don’t wish to follow the CRA’s lead, you are certainly welcome to do so, but it will likely not be with the blessing of the software.

In other words, there will be a manual workaround required to ensure the existing law — and not the proposed law — is adhered to. This will require a very detailed eye, manual calculations and adjustments to ensure the software produces the right results. But perhaps the updated forms and software will provide an option to not follow the proposals — we’ll see.

If the proposals don’t become law, it will take the CRA a lot of effort to reverse its systems back to reflect existing law to amend previously filed returns and process required refunds.

Our country suffers from a significant productivity challenge, so spending valuable taxpayer dollars on exercises such as this is frustrating.

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Last week, some tax practitioners called on the government to signal its intent to either drop the proposals or announce a change in the application date from June 25, 2024, to Jan. 1, 2025. Either announcement would provide significant relief during the upcoming 2024 personal tax filing season.

Other practitioners, including me, also called for these options, but did so last December when it became obvious the proposals were not going to get passed before Parliament recessed. At this stage of the game, it is very unlikely the government will step in to provide that relief.

Instead, Canadians and their advisers will need to decide how to report their capital gains: follow the CRA or follow existing law (since the CRA cannot force you to file on the basis of proposed legislation).

The most conservative thing to do, to avoid possible interest and possible penalties, would be to follow the CRA. But if you believe these proposals will not get passed, then the most practical thing to do is file on the basis of existing law, but you will need to accept the risk of interest and possible penalties should the law ever get passed.

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In other words, do what is right for you, but be aware of the risks and rewards of your choice.

This whole experience has highlighted, once again, how Canada is desperate for tax reform. It is badly needed to simplify the tax statute and its related administration to provide incentives for hard work and risk-taking (such as introducing significant personal tax reduction and better capital gains taxation) as well as a host of other measures.

Many of the recently introduced tax provisions that are so obviously politically motivated, rather than sound tax, economic and public policy, should be on the chopping block: the luxury tax, the underused housing tax, the prohibition of deductions on certain short-term rental properties, the “flipping tax” and a long, long list of other measures.

The current experience has also highlighted that tax reform should take a look at how proposed tax laws are administered. Does the CRA’s current approach need tweaking? It would certainly seem so in order to accommodate unusual situations like we are facing with the capital gains proposals.

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Overall, the capital gains proposals highlight the simple fact that a nation’s prosperity is not built on the promises of simple partisan politics, but on the strength of sound tax and economic policies that empower its people to thrive.

“Wealth is created by private individuals, not by governments,” Austrian–American economist Ludwig von Mises once said. “Governments are the stewards of good policy, not the creators of prosperity.”

It’s time for an election where Canadians can decide who they want to govern for the next four years. Let’s hope that choice brings a new government that appreciates the power of sound tax and economic policies.

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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