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Prorogation of Parliament and the proposed capital gains rate changes

Updated: January 10, 2025

On Jan. 6, Prime Minister Justin Trudeau asked the Governor General to prorogue Parliament until March 24, 2025.

This means that any unpassed legislation will need to be introduced in a new session of Parliament to proceed. With intense speculation that the current government will be defeated by late March, there is great uncertainty about how to file 2024 tax returns with realized capital gains or capital losses after June 24, 2024 as under proposed legislation, the capital gains/losses inclusion rate was to increase to 2/3 instead of 1/2 for capital transactions after June 24, 2024. (See Government confirms changes to capital gains inclusion rate for more detailed information). These proposals were not passed into law before Jan. 6.

However, as the capital gains changes were introduced to Parliament in a Notice of ways and means motion, the CRA has stated that they intend to administer 2024 capital transactions as if the proposed changes are law. In this regard, the CRA is following a long-standing bureaucratic practice. However, until the proposals are law, it appears that the CRA cannot enforce payment of increased tax that is a direct result of the proposals.

This leaves taxpayers with such capital transactions in 2024 with the following issues:

  • file tax returns with an increased inclusion rate (using the CRA forms) and potentially over-pay tax with a long wait for a refund if the proposals do not become law; or
  • pay tax assuming the 1/2 inclusion rate will continue and face non-deductible interest costs and possible penalties if the proposed legislation becomes law. Interest would be charged at a rate 2% (4% for corporations) higher than the rate at which CRA interest is earned.

Below, we have summarized these options. However, we cannot advise whether either scenario is more likely. Taxpayers will need to make their own decision based on their circumstances, which could include the size of capital gains realized in 2024, and their own risk tolerance and thoughts on the political outcome in Ottawa. Note that the proposals allowed individuals to have up to $250,000 per year of capital gains taxed at a 1/2 inclusion rate.

The following assumes that the CRA forms reflect the proposed legislation.

Option 1

Filing approach

File return using new 2/3 capital gains inclusion rate but proposals do not pass into law.

Interest implications

If the proposals do not pass, expect a refund of excess taxes paid plus interest at the prescribed rate (Q1 2025 non-corporate overpayments – 6%, corporate overpayments – 4%).

For individuals, including trusts, interest accrues from the latest of:

  1. May 30; (30 days after the return due date for trusts)
  2. 30 days after the day return was filed
  3. The day overpayment arose.

For a corporation, interest accrues from the latest of:

  1. 120 days after the end of the corporation's taxation year
  2. 30 days after the day return was filed, unless filed on or before due date
  3. The day overpayment arose.

Interest received must be reported as income of the taxpayer. However, if the proposals pass, there will be no adjustment to taxes and no interest for an overpayment of taxes if you filed using the proposals and the 2/3 inclusion rate where applicable.

Option 2

Filing approach

File return using 1/2 capital gains inclusion rate and proposals pass into law.

Interest implications

If the proposals do pass, it will be necessary to amend your return and pay additional taxes owing plus interest at prescribed rate (Q1 2025 – 8%).

Interest accrues from balance-due day, which is:

  1. For a trust, 90 days after end of the year
  2. For an individual, April 30
  3. For a corporation, two months after end of taxation year, or three months for eligible CCPCs

In addition, under-paid taxes can lead to under-paid instalments, and then under-payment interest and penalties will also apply. ( See Maximize efficiency when paying income tax in instalments).

This interest paid is non-deductible.

If the proposals do not pass, and you have filed using 1/2 inclusion rate, there will be no interest charge for underpaid taxes.

How BDO can help

If you have any questions, please contact your BDO advisor.

Greg London
Partner, Domestic Tax Consulting Leader
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Dustin Mansfield
Partner, Tax Compliance Leader
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The information in this publication is current as of January 9, 2025.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.