To file or not to file using the higher capital gains inclusion rate; that is the question this tax-filing season.
The 2024 federal budget proposed raising the capital gains inclusion rate to two-thirds, from half, on gains realized by corporations and trusts, and on annual gains above $250,000 for individuals, effective June 25, 2024.
The Canada Revenue Agency (CRA) is administering the changes as proposed, which is the agency’s long-standing practice with proposed legislation — no matter that the measure has withered on the vine given Parliament is prorogued until March 24 and an election is soon expected.
So, taxpayers have two choices: Voluntarily report gains at the higher 66.67% capital gains inclusion rate and potentially get a refund later for overpaid tax, or report gains at the current inclusion rate of 50% and potentially be reassessed and subject to unpaid tax with interest.
In Ontario an individual taxpayer at the top marginal rate would pay 26.76% on the first $250,000 of gains, and 35.69% above that threshold — a difference of 8.93%. A capital gain of $100,000 above the threshold would thus result in additional tax of roughly $9,000.
If the client doesn’t pay that tax and the legislation eventually passes (unlikely), the CRA would charge interest compounded daily from May 1, 2025. Using a daily compounding formula and the current interest rate of 8% on arrears tax, and assuming the tax is in arrears for one-quarter of the year, the interest would be $181.64.
But making a filing decision based on such calculations was called out by the authors of a C.D. Howe Institute article posted on Friday.
The legislative uncertainty forces taxpayers to “bet on potential outcomes,” which “undermines the government’s credibility and public confidence in the tax system,” wrote Carl Irvine, a member of the institute’s fiscal and tax competitiveness council, and John Tobin, a tax partner with Torys LLP.
Making the wrong bet also means onerous compliance costs, the authors wrote. And a complicating factor when choosing how to file is that “numerous consequential changes” to the Income Tax Act flow from the proposed increase to the inclusion rate, they added. As such, tax reporting software may not have the functionality to override reporting capital gains at the higher proposed rate.
The article also questions whether the CRA can efficiently refund excess tax to those who file based on the proposals, if refunds are required: Will the CRA reassess everyone who reported capital gains? Will taxpayers be forced to seek out their own refunds? If investment funds issue slips based on the higher inclusion rate, how will the CRA address the mismatch in reported gains?
The authors call on the government to drop the proposed changes or, alternatively, delay the effective date to Jan. 1, 2025.
“Although Parliament is prorogued, the government is still active and it has the ability to announce that the measure will not proceed,” the authors write. And deferral would “spare taxpayers the gamble of filing 2024 returns under a measure that may never pass” while also reducing “needless” compliance costs.