Toronto-based think tank C.D. Howe Institute released a new report calling on the federal government to “defer or abandon” its capital gains changes saying the current uncertainty leaves taxpayers with difficult choices, weighing on public confidence in the tax system.
C.D. Howe released the report on Friday, authored by John Tobin, a tax partner at Torys LLP, and Carl Irvine, a tax lawyer and member of the C.D. Howe Institute’s fiscal and tax policy council.
The federal government proposed an increase in the inclusion rate on capital gains taxes in its April 2024 budget, the report noted, describing the current situation as a “Kafkaesque tax quagmire.”
Last week the Canada Revenue Agency said it will continue to act on the changes, despite the fact that the legislation implementing them has not been passed in Parliament, which has been prorogued until March 24.
“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,” the report said.
“The government should abandon the proposed increase. If it will not, 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.”
Amid the current situation, the report says taxpayers face uncertainty, which impacts individuals set to make large gains as well as trusts, corporations and non-residents. According to the report, this is “creating complex reporting requirements under an uncertain legal framework.”
“With the likelihood of a spring election, taxpayers face a choice: pay at the higher rate now and struggle to recoup overpayments if the measure dies, or follow existing law and risk interest and penalties should it eventually pass,” the report said.
C.D. Howe’s latest report comes a day after Pierre Poilievre, the leader of Canada’s Conservative Party, promised to eliminate the increase to the capital gains inclusion rate if elected, according to Bloomberg News.
The Toronto-based think tank also released a similar report last week, saying the proposed tax hike would impact people and companies more broadly than the federal government estimated, arguing it should be scrapped amid political uncertainty.
For stakeholders, C.D. Howe’s latest report says they now have to “bet on potential outcomes.”
“Having to make such a bet undermines the government’s credibility and public confidence in the tax system. As noted above, in normal times, the likelihood of passage of introduced tax legislative changes is close to 100 percent, so it is prudent for taxpayers to fully comply with proposals and for CRA to “provisionally” administer on that basis,” the report said.
If tax filers bet correctly, the authors say no further action will be needed.
“If they bet incorrectly, they will have to refile and either (i) report more income and pay interest or (ii) claim a refund and receive some partial interest, depending on the direction of the political outcome they bet upon,” the report said.