
Judicial Review of the CRA Preemptive Action on Capital Gains Rate Changes
On January 8, 2025, the Canada Revenue Agency (CRA) announced that, for the upcoming tax season, it will proceed with administering the proposed capital gains rate changes outlined in the 2024 Federal Budget as if it was already law. This decision has left many Canadian tax professionals questioning how the CRA can take such action before the legislation is officially passed.
As this situation unfolds, multiple lawsuits have been filed in the Federal Court, seeking judicial review of the CRA’s decision to apply the increased capital gains rate retroactively before any law has been enacted. These legal challenges aim to prevent the CRA from proceeding with this move.
Why Did the CRA Make This Move?
The CRA, as a crown corporation, has a legislative mandate to administer, among other things, the Income Tax Act. However, the CRA does not have the power to make up its own rules (law or regulations) as dictated by the Constitution Act. According to the Constitution, all ‘money bills’ must originate from the legislative branch of government, and the enabling statute which incorporated the CRA itself.
Ultimately, we can only speculate on the reason and arguments raised internally at CRA which led to this decision. One possible explanation could be expediency. Since the proposed changes to the capital gains rate are intended to be retroactive to June 25, 2024, the CRA may be attempting to simplify the tax process and avoid additional administrative costs. By acting as though the change already occurred, the CRA may reduce the need for future audits and reassessments of tax filings once the law is formally passed.
What Authority Does the CRA Have?
While the decision to administer changes to the Income Tax Act which are not yet of force and effect is not without precedent, in these particular circumstances, it is rather peculiar.
The current government does not hold a majority of the votes in Parliament and the opposition parties have now all publicly indicated their intention to oppose the legislation if it comes to a vote when Parliament resumes.
The proposed change to the capital gains inclusion rate has not only failed to pass into law yet, but the bill has not been introduced for its first reading. Pierre Poilievre, leader of the Conservative Party of Canada, has made several public statements expressing his intention to reverse the change, a sentiment echoed by candidates vying for the soon-to-be-vacant position of leader of the Liberal Party of Canada. Given these developments, the likelihood of the legislative changes coming to fruition seems increasingly unlikely.
This raises the crucial question: If this change never becomes law, what authority does the CRA have to implement it?
The CRA’s authority stems from the Canada Revenue Agency Act, 1999. In particular, sections 6 to 8 grant powers, duties, functions, and delegation thereof, to the Minister of National Revenue and the CRA. This includes ‘all matters over which Parliament has jurisdiction, not by law assigned to any department, board or agency of the Government of Canada other than the Agency, relating to’ [duties of excise, stamp duties, internal taxes including income taxes, and collection of certain debts].
However, the Financial Administration Act, 1985, stipulates that the Minister shall table, before the House of Commons, a list of specific legislative changes to tax laws in Canada, including the Income Tax Act or Income Tax Regulations. For the purpose of the Financial Administration Act, ‘the Minister’ does not refer to the Minister of National Revenue, but rather, the Minister of Finance.
Further, section 10 of the Financial Administration Act gives Treasury Board the authority to make regulations relating to the management and administration of public funds. The Federal Court will ultimately decide how these legislative provisions impact the CRA’s authority to implement tax changes before they become law.
What Does This Mean for Taxpayers?
For most taxpayers and tax professionals, the most pressing concern is whether or not they will need to pay the higher capital gains rates. Fortunately, the situation is more straightforward than it may seem.
The obligation to pay tax on capital gains remains unchanged until the proposed changes are officially enacted. Even if the changes are retroactive, this does not mean taxpayers will be penalized for not paying the higher rates when filing their returns. If the changes eventually become law, taxpayers may owe additional tax (plus interest) on gains made after the proposed June 25, 2024, date.
Filing Options for Taxpayers
Given the current uncertainty, taxpayers have two options for filing their tax returns:
- File your return at the higher capital gains rate – If the changes pass into law, you will be compliant, and any overpaid tax will be refunded with interest.
- File your return at the existing lower rates – If the changes do not become law, you will have paid the correct amount. If the changes do pass, the CRA may audit your return and reassess you for the additional tax owed.
While both options have their risks, filing your return accurately and on time will ensure compliance with the current tax law, regardless of the future outcome.
The Importance of Professional Guidance
Navigating these complexities can be daunting, and in many cases, taxpayers may benefit from consulting a tax professional, such as an accountant or tax lawyer, to ensure compliance. Those who attempt to handle this alone may find that the cost of non-compliance far outweighs the potential savings.
Tax laws can be tricky, and with proposed changes still in limbo, it’s more important than ever to stay informed and seek professional advice.
***Disclaimer: This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions, you should consult a lawyer.