Ottawa Needs to Act to Stop a Kafkaesque Tax Quagmire

January 17, 2025 – The federal government must at least defer the proposed increase to the capital gains inclusion rate to avoid a nightmarish scenario for taxpayers, according to a new C.D. Howe Institute E-Brief.

“A Kafkaesque Tax Quagmire: Why We Need to Defer or Abandon the Failed Capital Gains Changes” highlights the dilemma many tax filers will face this tax season because the capital gains tax increase announced nine months ago has never been passed into law.

Prime Minister Justin Trudeau prorogued Parliament until March 24, so the changes cannot be made official until tax season has already started. And with the distinct possibility that elections will take place in the spring and result in a new government, the increase may never be enacted at all.

But that doesn’t let businesses and people who earned capital gains in 2024 off the hook, E-Brief authors John Tobin and Carl Irvine point out: In anticipation that the change would become law, the Canada Revenue Agency (CRA) has been administering the changes since June 25, 2024.

That leaves taxpayers with a difficult choice: Pay at the higher rate now and struggle to recoup overpayments when the measure likely dies, or follow existing law and risk interest and penalties should it eventually pass.

The proposed rules affect not only individuals with large gains but also trusts, corporations, and non-residents, creating complex reporting requirements under an uncertain legal framework. Software updates, tax slips, and filing instructions are already being tailored to legislation that does not yet exist.

“This administrative limbo erodes public confidence in the tax system, as taxpayers and tax preparers struggle with a rule that might never be legally enacted,” Tobin and Irvine write.

They call on the government to abandon the proposed increase. If it will not, they argue it should delay the effective date to at least January 1, 2025, to spare taxpayers the gamble of filing 2024 returns under a measure that may never pass.

This deferral would reduce needless compliance costs. If the government insists on retroactive application, the CRA should provide relief by waiving interest and penalties for taxpayers who file under current rules.

“Canadians deserve a predictable tax system, not one that forces them to hedge bets on unpassed legislation.”

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For more information contact: John Tobin, Partner, Torys LLP; Carl Irvine, Tax Lawyer, and Member, Fiscal and Tax Policy Council, C.D. Howe Institute; Daniel Kitts, Communications Officer, C.D. Howe Institute, 416-220-8470, dkitts@cdhowe.org

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.