On January 6, 2025, Prime Minister Justin Trudeau announced that he will step down from his position as Prime Minister and requested that Parliament be prorogued until March 24, 2025 (which was approved by the Governor General). For Canadian taxpayers, this turn of events begs the question: what does prorogation of Parliament mean for the increase to the capital gains inclusion rate and other tax legislation that has not yet received Royal Assent?

In order to introduce a bill that introduces a new tax, continues an expiring tax, increases a tax or extends the application of a tax, the House of Commons must adopt a “Ways and Means” motion. A notice of Ways and Means motion (NWMM) may be tabled at any time, but is often tabled shortly after a Budget presentation.[1] On September 23, 2024, the government tabled a NWMM to introduce a bill that included several new tax measures, including increasing the capital gains inclusion rate for capital gains realized after June 24, 2024 (the Capital Gains Legislation).[2]

Conventionally, taxation proposals are administered by the Canada Revenue Agency (CRA) as if they were effective as soon as the NWMM is tabled. Therefore, even though it may take weeks, months or even years for the implementing legislation to be passed by Parliament, the CRA collects taxes as of the day the NWMM is tabled. This practice, known as the “provisional implementation of taxation”, has no statutory basis but is done for a number of reasons, including to give certainty to fiscal planning, to curtail tax planning and to prevent commercial disruptions.[3]

Generally, when Parliament is prorogued all unfinished business “dies” on the Order Paper. Bills which have not received Royal Assent before prorogation are “entirely terminated” and must be reintroduced as if they had never existed (or in certain circumstances, reinstated by motion at the start of a new session of Parliament at the same stage they had reached at the end of the previous session).[4] Despite this, on January 7, 2025, the Department of Finance announced that the CRA will adopt its practice of administering the Income Tax Act (Canada) (the Tax Act) as if the tax measures announced in the September 23, 2024, NWMM, including the Capital Gains Legislation, are effective.[5]

Without a crystal ball, it is impossible to predict what will become of the Capital Gains Legislation when Parliament resumes on March 24, 2025. It is also possible that the fate of the Capital Gains Legislation will not be known with certainty by April 30, 2025, the 2024 income tax return filing deadline for most individual taxpayers. What, then, should taxpayers do?

In this respect, taxpayers should expect that the CRA will administer the Capital Gains Legislation, consistent with the provisional implementation of taxation and the CRA’s announcement until further notice. Taxpayers can file their 2024 income tax returns and pay taxes based on how the CRA is administering the Tax Act (with the proposed higher rates for capital gains realized after June 24, 2024). If this is done and the Capital Gains Legislation never comes into force, taxpayers may have to file amended returns or object to the notice of assessment in order to facilitate a refund of the overpaid tax. 

Taxpayers may also wish to file their 2024 income tax returns and pay tax on capital gains realized after June 24, 2024, on the basis of the existing tax laws (i.e., with the one-half capital gains inclusion rate). Such taxpayers would not be wrong in their decision to do so – the Capital Gains Legislation is, after all, not currently the law. According to the CRA’s guidelines, the CRA cannot require a taxpayer to file an income tax return on the basis of proposed legislation that is not beneficial to the taxpayer.[6] However, if the Capital Gains Legislation receives Royal Assent, they should expect to pay additional tax to make up the difference in the capital gains inclusion rate, plus interest. In these circumstances, it is unlikely that any penalties apply or that the CRA would apply penalties in respect of the unreported income.

For more information on this topic, please contact the authors, Larry Nevsky or Paige Donnelly.

[1] https://www.ourcommons.ca/MarleauMontpetit/DocumentViewer.aspx?DocId=1001&Sec=Ch18&Seq=5&Language=E 

[2] https://fin.canada.ca/drleg-apl/2024/nwmm-amvm-0924-eng.html

[3] http://www.revparl.ca/34/2/34n2_11e_Lukyniuk.pdf

[4]https://www.ourcommons.ca/MarleauMontpetit/DocumentViewer.aspx?DocId=1001&Sec=Ch08&Seq=7&Language=E

[5] https://www.ctvnews.ca/politics/cra-to-continue-with-capital-tax-changes-despite-prorogation-finance-department-1.7167151. See also https://www.canada.ca/en/revenue-agency/services/forms-publications/tax-packages-years/general-income-tax-benefit-package/5000-s3.html. 

[6] See CRA Income Tax Audit Manual, 2020-09, section 12.3.5.