Taxpayers who sold property earlier this year to avoid the federal government’s hike to the capital gains inclusion rate (CGIR) could regret having done so if the tax measure is not passed into law before the next federal election.
On Sept. 23, the Liberal government tabled a notice of ways and means motion (NWMM) in the House of Commons to implement the CGIR changes. But as of Thursday, the government had not been successful in holding a vote on the measure as the House debated matters of privilege introduced by the Conservatives.
In the meantime, the government has survived two recent non-confidence motions tabled by the Tories, who have promised to bring forward more such motions in hopes of triggering an early election.
In addition, the NDP ended its confidence and supply agreement with the government last month, indicating it would support government legislation on a case-by-case basis only. And the Bloc Québécois has said its support for the Liberals is contingent on the government working with it to pass certain key legislation the Bloc favours.
In its 2024 budget tabled April 16, the government announced it was hiking the CGIR to two-thirds, from half, on gains realized by corporations and trusts, and on annual gains above $250,000 for individuals.
It also gave taxpayers a 10-week period — up until June 25 — within which they could realize gains and still access the CGIR of half.
Six months later, the Liberal government seems committed to seeing the legislation pass. Indeed, the draft legislation that accompanied the Sept. 23 NWMM included a June 25 effective date.
“There’s every indication that the government intends to proceed [with the changes],” said Mahmood Nanji, a fellow with the Lawrence National Centre for Policy and Management, Ivey Business School, at Western University in London, Ont.
Nanji, a former associate deputy minister in Ontario’s Ministry of Finance under Kathleen Wynne’s Liberal government, said he believes there’s “a high probability” that the federal government will eventually find a way to have the CGIR legislation come to a vote and passed with the help of either the NDP or Bloc Québécois, or both.
“At the end of the day, the government will get its priority pieces of legislation done before Dec. 31,” Nanji said. “I would consider that the [CGIR] legislation will be one of those priority pieces.”
However, if the government were to be defeated on a non-confidence motion before then, or if it were to call an early election, all bills before Parliament — including the CGIR legislation — would be dropped.
“The June 25th date is only relevant if [the CGIR draft] legislation ultimately receives royal assent,” said John Oakey, vice-president of taxation with CPA Canada in Dartmouth, N.S., in an email to Investment Executive.
After an election, a “new government could introduce the current [CGIR] draft legislation, introduce amended draft legislation, or discard the draft legislation entirely.”
If the Conservatives, which voted against a June 10 NWMM to implement the CGIR changes, were to form the next government without the legislation having been enacted, “you can almost assume that the changes will not proceed,” Nanji said.
If a new government were to abandon the CGIR changes or substantially alter the legislation, some taxpayers could regret rushing to sell appreciated assets — say, a vacation property — before June 25, earlier than they might have sold otherwise.
“Taxpayers that prematurely sold assets to take advantage of the 10-week window may have serious grievances with the current government [if the legislation were not enacted],” Oakey said.
If legislation to hike the CGIR is not enacted, a taxpayer who pre-emptively sold an appreciated asset at the 50% CGIR would be no worse off from a tax perspective. However, they may regret having sold a property in, say, unfavourable market conditions or under pressure because of the June 25 effective date.
“Clients have done all this planning, paid all these professional fees to do pre-June 25 type planning, [taken] all this time and effort [to consider] whether to crystallize gains and lock in the 50% CGIR, but it may all be for nothing if these changes don’t actually pass,” said Henry Korenblum, president of Korenblum Wealth Inc. in Toronto.
“I’m not saying it’s probable, but it’s possible that these [CGIR] changes don’t happen, especially if you have a change in government,” Korenblum said.
If the government were to ask the Governor General to prorogue Parliament in the coming weeks, all legislation that hadn’t received royal assent would also be dropped. If the government wanted to proceed with legislation in a new session, it would have to reintroduce it.
During an Oct. 8 press conference, Deputy Prime Minister and Minister of Finance Chrystia Freeland responded “no” when asked if the government was considering proroguing Parliament.
Even if the government ultimately is successful in passing the legislation before the end of the year, taxpayers and their advisors will be left at a disadvantage in the meantime, Oakey said.
As things stand, the Canada Revenue Agency will be challenged to update tax forms or provide guidance based on proposed legislation, Oakey said, and clients and their advisors will have to engage in end-of-year planning — such as whether to trigger tax losses to offset gains — in the dark.
“The uncertainty in the tax system is unwelcomed for those persons who are currently trying to plan their tax affairs this fall,” Oakey said. “The uncertainty in the tax system is much worse for those persons that already carried out their tax affairs based on a tax proposal.”
Background to CGIR changes
In the 2024 budget, the federal government announced it was hiking the CGIR to 67.7% on gains earned by corporations and trusts, effective June 25. Individuals would also be subject to the two-thirds CGIR but could continue to access the 50% CGIR on annual gains under $250,000.
On June 10, the government tabled a notice of ways and means motion (NWMM) in the House of Commons to implement the increase in the CGIR, which included draft legislation. In the draft legislation, the government extended the $250,000 annual exemption to two types of trusts: graduated rate estates and qualified disability trusts.
The following day, the Liberal government passed the NWMM with the support of both the NDP and the Bloc Québécois. The Conservatives voted against it.
On Aug. 12, Finance released a second set of draft legislation to implement the CGIR hike and announced a consultation period ending Sept. 3.
On. Sept. 23, the government tabled a NWMM to implement the CGIR hike, releasing a third set of draft legislation that included technical amendments. As of Oct. 10, the NWMM had not come to a vote in the House.