The CRA and Government Can Often Have Problems When Administering Tax Proposals as If They Were Law

There have been many recent issues regarding the Canada Revenue Agency’s policy that enables it to administer proposed tax law retroactive to the proposed effective date.

Most egregious was the proposed capital gains inclusion rate increase last year. No bill was ever presented to Parliament, only a Notice of Ways and Means, but given the CRA’s longstanding position on administering proposed tax changes, it had the ammunition to treat it as law.

That position, consistent with parliamentary convention, is that it will wait for royal assent of any legislation before issuing refunds or making payments of public funds. In cases other than payments or refunds, the CRA will administer a proposed tax measure upon its announcement if the legislative amendments are publicly available in final form and presented to Parliament as either a ways and means motion or bill.

Draft legislation released to the public for consultation – such as the massive batch of technical amendments released by the Finance department this month – does not fit within the CRA’s administrative practice because such proposals have not yet been presented to Parliament despite their retroactive intended application dates.

Despite the CRA’s position, there is no need for the public to comply with its administrative practice until such time as the proposals are law. There are also many situations that don’t fit neatly within the CRA’s practice. For example, what happens if a proposal is abandoned and never becomes law? Or a controversial proposal before Parliament by a minority government with little likelihood of passing?

Again, the 2024 capital gains proposals offer a good example. They were a political hot potato and ultimately dropped earlier this year, but not before the CRA spent significant resources administering them.

Worse, many taxpayers triggered non-reversible transactions to get ahead of the proposed tax increase. The Canadian Taxpayers Federation has challenged the CRA’s practice on this and this month a Federal Court judge cleared the way for its case to proceed.

Less controversially, the new federal government proposed a 1-percent personal tax decrease for the lowest tax bracket, effective July 1, 2025. The bill presented to Parliament passed second reading in the House of Commons, but ultimately died at the summer recess. To make this effective law, the proposal will need to be brought before Parliament again on the way to Royal Assent with that retroactive effective date.

Government members, including the Prime Minister, have been cheering the tax decrease as if it’s effective law. It’s not, even if the CRA is administering it as if it is.

Many argue that the CRA should only administer tax rules that have been passed into law. Some go further and suggest that no tax proposal should have a retroactive effective date. Those suggestions are conceptually simple and would certainly avoid the chaos we have seen over the years, but there would be other consequences if adopted.

A 1985 discussion paper, The Canadian Budgetary Process Proposals for Improvement, the government recognized the problems that can exist with administering tax proposals. It also laid out the need for some tax proposals to have retroactive effect. It begins on page 180 of Michael Wilson’s 1985 budget papers and is a compelling read. As a side note, the document also laid out the need for fixed budget dates as opposed to floating dates, an idea I urge upon the government.

In order to deal with the problems of administering proposed tax legislation, the paper stated the following:

“The government believes that the need for provisional implementation and collection of taxes prior to their enactment can be more effectively met if specific authorizing legislation is put in place. Therefore, a statute along the lines of the provisional collection of taxes legislation in force in the United Kingdom will be proposed to Parliament. A draft bill entitled the Provisional Implementation of Taxation Measures Act is appended to this paper.”

The proposed legislation would have imposed time limits – “nine months of House of Commons time” – on the provisional administration of new tax rules before they had to be formally enacted or abandoned.

Unfortunately, the proposals were never forwarded, as outlined in a recent C.D. Howe Institute paper.

It’s time to try again, as the Joint Committee on Taxation of the Canadian Bar Association and CPA Canada recommended, in a January submission to the Finance department.

Forty years ago, the government recognized the problems of administering proposed tax legislation. The damage and uncertainty can be great when situations arise that don’t neatly fit within the CRA’s policy of administering tax proposals, and that can lead to an erosion of trust in our tax system.

Provisional administration is often necessary, but it should be tightly constrained by law to protect both taxpayers and trust in the system.

Kim G. C. Moody is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, and former chair of the Society of Estate Practitioners (Canada).

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The views expressed here are those of the author. The C.D. Howe Institute does not take corporate positions on policy matters.