In Budget 2024, presented in April, the government announced proposals to increase the inclusion rate from one-half to two-thirds of capital gains above $250,000 for individuals, and for all of capital gains earned by corporations and trusts.
The proposals have not received legislative approval and former finance minister Chrystia Freeland recently said she would scrap the changes she introduced if she's elected party leader.
The Canada Revenue Agency (CRA) has, however, issued statements confirming that it will administer the changes, citing Parliamentary convention that taxation proposals are effective as soon as they are tabled in a notice of ways and means motion (NWMM).
Tax law firm Thorsteinssons LLP has filed a challenge against the CRA’s decision to implement the change prior to it being approved in Parliament, according to a Jan. 27 release.
“Among other things, the Convention assumes the ongoing operation of Parliament in circumstances where the government enjoys the confidence of a majority of the members of Parliament, which is clearly no longer the case,” Thorsteinssons LLP wrote in a notice of application brought on behalf of a B.C. company.
The applicant also noted that the convention of immediately applying the NWMM ceased to have any force or effect once Parliament was prorogued.
“The Proposals are clearly unlike virtually all other tax measures which are presented before Parliament. The Proposals, specifically, have garnered significant pushback — both political and apolitical — casting direct doubt on whether they will ever be enacted,” the notice of application reads.
Thorsteinssons LLP highlighted that the federal NDP has announced it will bring forward a motion of non-confidence in the government early in the next sitting of the House of Commons and that the Conservatives have confirmed they will vote in favour of such a motion.
The law firm also noted that the Bloc Québécois has issued a statement calling for an election to be held in early 2025 so that a new government can be formed.
The application noted that the CRA’s decision to implement the relevant change was issued despite “manifest uncertainty over whether the Proposals would ever be enacted.”
Counsel for the applicant, David Davies of Thorsteinssons LLP, said that one of the key factors behind the legal challenge is the uncertainty that the proposals will be enacted into law.
“If Parliament was sitting in the normal course, and it was a majority government … or even minority, with the Liberals and NDP as prior to Christmas, then I don't know that anybody would have taken issue with it because of the expectation that this legislation would pass in normal course early in the year,” he told Law360 Canada.
In the notice of application, the law firm noted that in announcing the implementation of the changes, the CRA and the Minister of National Revenue announced their intention to compel taxpayers to comply with an unsupported capital gains inclusion rate without the sanction of Parliament.
“In doing so, the Minister of National Revenue and the CRA have effectively usurped Parliament’s prerogative and exclusive authority to create tax laws,” the application reads.
Thorsteinssons LLP has also submitted that the decision forces taxpayers to either comply with the law as enacted or comply with the CRA.
“Failing to do either could lead to extreme monetary consequences, including additional tax, penalties, and arrears interest of huge magnitude,” the law firm noted.
The applicant has sought, among other things, an injunction against the Minister of National Revenue and the CRA from administering the Income Tax Act in accordance with the proposals.
The CRA did not immediately respond to a request for comment.
On Jan. 24, the Ottawa-based Canadian Taxpayers Federation (CTF) announced it is also filing a legal challenge to stop the CRA from enforcing the capital gains tax increase for the same reason.
“The government has no legal right to enforce this tax hike because it has not received legislative approval by Parliament,” CTF general counsel Devin Drover said in a Jan. 24 news release.
“This tax grab violates the fundamental principle of no taxation without representation," he added. "That’s why we are asking the courts to put an immediate stop to this bureaucratic overreach.”
The CTF is representing Debbie Vorsteveld, a resident of Mapleton, Ont., who recently sold a secondary home with her husband, a transaction that could incur the higher capital gains tax.
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