(Bloomberg) -- The increase to Canada’s capital gains inclusion rate is facing legal challenges after leading politicians pledged not to implement the hike if elected.
The country’s largest tax law firm, Thorsteinssons LLP, and the Canadian Taxpayers Federation filed separate legal challenges in the Federal Court of Canada. They’re contesting the Canada Revenue Agency’s decision to administer the capital gains tax at a higher inclusion rate — even though the government was never able to pass legislation to implement that policy.
Then-Finance Minister Chrystia Freeland introduced the change in the 2024 federal budget, increasing the inclusion rate to two-thirds from one-half for all corporations and trusts, and for individuals with gains above $250,000 (US$173,800). The effect was to increase the government’s take of asset sales.
The CRA is the Canadian equivalent of the Internal Revenue Service, processing tax filings and enforcing rules. Its standard practice is to begin implementing tax changes once they’re announced, on the assumption they will eventually become law.
But with an election looming and Parliament temporarily suspended, the government’s capital gains reform is unlikely to be passed at all, according to the parties filing the court challenges.
Taxpayers “will be faced with either complying with the law, or complying with the CRA. Either course could lead to significant financial repercussions,” Thorsteinssons said in a news release.
“The CRA has been peppering the public with messages about how it will administer the rule change as though it’s been enacted,” David Davies, a tax litigator with Thorsteinssons, said in an interview. “We think that introduces an intolerable level of uncertainty.”
Conservative Leader Pierre Poilievre — whose party is ahead by about 20 points in some opinion polls — has said he’s against the hike. Freeland, who quit the finance post in December and is now running to replace Justin Trudeau as prime minister, has said any government led by her would not proceed with the measure.
“It is the role of our elected representatives to make these types of decisions and not bureaucrats or the executive wing of government,” Devin Drover, general counsel with the taxpayers’ federation, said in an interview. “We want to see government being accountable to Canadians such that they’re abiding by the constitution.”
The hike was to take effect on June 25, 2024, and some businesses sold assets before that date to avoid the higher inclusion rate.
Business leaders have called on new Finance Minister Dominic LeBlanc to resolve the issue.
The government projected the increased inclusion rate would bring in more than $19 billion over five years, with some of the revenue being earmarked for housing measures and other social programs.
The CRA and the Department of Finance did not immediately respond to emailed requests for comment.