How could the increase in the capital gains inclusion rate take place?

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Finance Minister Chrystia Freeland said she would present the late fall economic statement on Monday, just a day before the last sitting of the House of Commons on December 17. Why this delay? I don’t buy the lame excuse that the filibuster is the cause. Rather, it is a continuing demonstration of the overall incompetence of this government.

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Despite this, I look forward to seeing an update on the size of the federal deficit and the games that have been played to smooth over our country’s horrible budgetary mess. Let me go on the record and say that the estimated deficit will be much larger than previously anticipated.

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I also hope that we will no longer see so-called gifts handed out. Our country cannot afford them. Instead, we need a set of pro-growth and pro-productivity measures to counter our weak economic performance and what is coming from the United States. Such measures should include massive and significant spending cuts.

Unfortunately, we won’t see any of these measures in the statement. Instead, we will continue to see more of the performative theater that this government is obsessed with.

On the tax side, I hope we get an update on the status of the capital gains inclusion rate proposal. With just one week until the House of Commons closes for the year, it’s fair to say that 2024 will not be the year this measure passes.

The government has a number of options for dealing with the capital gains proposal. The first is that he will see the light and abandon it. This won’t happen. He vigorously defended this proposal as necessary for the “rich” to pay more and to respect intergenerational “equity”. Abandoning this absurd message now would be too great an about-face for the government.

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The second option would be to present the proposal in a bill once the House of Commons reconvenes next month. Such a bill would ensure that it continues to be in effect retroactively to June 25, 2024.

The third option is to delay tabling the bill in the House until after the 2025 federal budget is presented, likely in March or April. This would ensure that the proposal comes into force retroactively to June 25, 2024 and would give the government time to perfect the bill (which is still imperfect and very complex).

But if the second or third option is chosen, how should affected taxpayers manage realized or deemed capital gains in the meantime? Should they report capital gains as if the proposals applied?

The Canada Revenue Agency encourages taxpayers to do so, because if the proposals become law, it will have to administer and collect taxes on this basis. Interest charges may also apply, although the CRA announced it would offer limited relief until March 3, 2025.

But what happens if the proposals never become law? Based on this, taxpayers should request a refund via amended tax returns. Under these alternatives, how can the CRA update its prescribed forms and administer the proposals if they are unlikely to become law until late spring?

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The fourth alternative is for the government to hold elections before the proposal is adopted. This would make the proposal disappear and a new government would have to reintroduce it to Parliament if it so wished.

I was discussing this mess with a friend last week and he suggested that perhaps there was a fifth alternative to the government to deal with the capital gains proposal.

It’s a hybrid of the first three options above. In the fall economic statement, the government could announce another so-called gift by changing the implementation date of the capital gains increase to January 1, 2025, instead of June 25, 2024, as of Many people called for it when the proposal was published. last April.

If this fifth option comes into play, I can already hear the protests of many concerned Canadians, because it would add to recent examples which would force them and their advisors to engage in complex and costly matters only to to say that the measures were delayed (just like in the debacles of the simple trust and the underutilized housing tax declaration). These are the rebuttals I provided to my friend.

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But he reminded me that the “mess” the government finds itself in (given the long delay between the proposed effective date and today is now approaching six months) would be significantly reduced if the fifth alternative were proposed.

The CRA would not have to worry about administering the proposed 2024 law, while taxpayers and their advisors would get immediate clarity. It would also eliminate the need for taxpayers to preemptively change their tax software and file tax returns based on uncertain law, saving them significant time and effort. The Liberal-NDP electoral base would probably be indifferent since they could still cling to their “fairness” argument.

What is my guess? I’m still hesitant to be a prognosticator, but I predict that some version of the second alternative above will eventually come to fruition.

Economist Adam Smith said in The Wealth of Nations: “The tax which each individual is required to pay must be certain and not arbitrary. As soon as it becomes arbitrary, the government begins to lose the trust of the people. »

And 20th-century American businessman Robert Half once said, “People try to live on their income so they can afford to pay taxes to a government that can’t live on its income.” »

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These are two very judicious ideas that our government should think about when preparing its fall economic statement. Canadians need our tax system to become secure and our government to live within its means. Ambitious goals, indeed, for our current government.

Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, past president of the Canadian Tax Foundation, past president of the Society of Estate Practitioners (Canada) and has held numerous other leadership positions at within the Canadian sector. tax community. He can be reached at [email protected] and his LinkedIn profile is https://www.linkedin.com/in/kimgcmoody.

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