CRA Forges Ahead with Capital Gains Tax Changes Despite Parliamentary Uncertainty

In a significant development, the Canada Revenue Agency (CRA) has confirmed it will proceed with implementing controversial capital gains tax changes despite Parliament’s prorogation until March 2025. The changes, which increase the inclusion rate from 50% to 66.67% for gains above $250,000, are being administered even though they haven’t been formally passed into law.

The Department of Finance has stated that the CRA will continue implementing these changes based on the Notice of Ways and Means Motion tabled in September 2024. For taxpayers, this means the new inclusion rate applies to capital gains realized since June 25, 2024, creating a complex situation where they must comply with proposed legislation that may never become law.

To facilitate this transition, the CRA will issue updated tax forms by January 31, 2025. In recognition of the potential challenges this creates, the agency has announced interest and penalty relief for corporations and trusts affected by these changes, provided their filing deadlines fall on or before March 3, 2025.

The situation has sparked debate among tax experts and business leaders. Kim Moody, a prominent tax expert, questions the wisdom of requiring taxpayer compliance with proposals that may not survive parliamentary scrutiny. The Canadian Federation of Independent Business has expressed concerns about the uncertainty this creates for their members, potentially lasting a year or more.

In parallel developments, the CRA is implementing other significant changes for 2025. Starting in spring, the agency will transition to online mail as the default method for most business correspondence. This digital transformation aims to streamline communication through My Business Account, affecting new registrations and existing businesses.

The tax landscape for 2025 also includes adjusted federal tax brackets, with a 2.7% increase to account for inflation. This adjustment means Canadians can earn more before moving into higher tax brackets, potentially reducing their overall tax burden.

For businesses and individuals planning their 2025 tax strategy, the situation requires careful consideration. If the capital gains changes aren’t ultimately passed into law, those who filed under the new rates will need to amend their returns and wait for refunds. Conversely, those who choose to file under the old rates risk interest charges and penalties if the changes are eventually enacted.

The timing of these developments is particularly significant given the political uncertainty following Prime Minister Justin Trudeau’s announcement of stepping down and proroguing Parliament. With a potential spring election looming, the fate of these tax changes remains uncertain, creating a challenging environment for tax planning and compliance.

The CRA has emphasized that this approach follows standard practice, where taxation proposals take effect as soon as a Notice of Ways and Means Motion is tabled. This convention is designed to ensure consistency and fairness in taxpayer treatment, though some argue it creates unnecessary complications in times of political transition.

Looking ahead, taxpayers and businesses must navigate this period of uncertainty while maintaining compliance with current CRA directives. The agency has indicated it will support taxpayers in processing any necessary corrective reassessments should the proposed measures not proceed5, though the timeline and process for such corrections remain unclear.